Partial Ownership and Strategic Alliances with Reallocation of Corporate Resources

This paper considers the role of equity transfer to strategic alliance partners in mitigating the moral-hazard problem that occurs if a participating firm faces some possibility of reallocating a part of the resources devoted to the joint project of the strategic alliance or retreating from the strategic alliance before completing the joint project. I derive a situation in which equity transfer in the strategic alliance is a component of an optimal contract, in particular, in which equity transfer in the strategic alliance is superior to the contract with the cash transfer only. I also analyze optimal equity stake sizes.