Repeated moral hazard in international joint ventures: Inter-temporal culturally sensitive incentive schemes for hidden action

This paper studies a repeated game of contracting in International joint ventures (IJVs) on the basis of information asymmetries due to different cultural backgrounds. Reputational effects, renegotiation and cooperation between the players are analyzed by using formal models. The organization, success and failure of an IJV are determined by the effort levels induced in each stage of the life-cycle. Besides managerial efforts, the cultural distance and convergence influence the design of long-term contracts in form of incentives for efforts of cultural cooperation. This leads to a dynamic contracting over the life-cycle of an IJV, in order to avoid cheating and to enhance co-operation on a cultural and managerial level. The outcome is the design of inter-temporal, culturally sensitive incentive schemes as a new approach to contracting in IJVs.