Joint Ownership of Production Projects as a Commitment Device against Interest Groups

This paper investigates a hitherto unexplored rationale for firms to have joint ownership of a production project. We model risky projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. However, internal and external interest groups are likely to pressurize owners into paying out early revenues from such investments precisely when the autocorrelation of productivity implies they should be reinvesting them in the project. Joint ownership provides a commitment mechanism against interest groups, thereby enabling more efficient levels of investment. The Business Environment and Enterprises Performance survey data corroborate the model's prediction that organizations under conditions favorable to internal or external lobbying pressure are more likely than other firms to choose joint ownership.