Design, Bargaining, and the Law
Chapter 4: Bargaining over sharing total return
The purpose of bargaining over sharing total return is to maximize synergies realized by each JV partner. Such synergies include three types of return: return on investment, return from transactions, and ancillary return. Whichever form the return from a joint venture takes, the joint venture is a success if the sum total of the three types of return is maximized for each partner and exceeds initially planned return. Bargaining over sharing of total return is the process of setting rules for sharing the three types of return between partners. In bargaining over sharing total return, partners first determine return on investment. Return on investment takes the form of profits derived from the joint venture and is shared in proportion to the partners’ respective ownership percentages. As such, it is generally not susceptible to disagreements during incentive bargaining. Partners can determine return on investment through a comparative analysis of the possible courses of action: (1) unilateral market entry, (2) market entry through a joint venture, and (3) forgoing market entry completely. Next, they should design an incentive framework and utilize return from transactions to rectify any imbalances.Lastly, individual partners should identify opportunities for capturing private gains, or ancillary return, from participation in the joint venture. If they follow this process, they should be able to rationally justify their decision to establish a joint venture to their shareholders and stakeholders (e.g., creditors, suppliers).
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