David Gomtsyan (UCA, CERDI)

The Joint Venture

Abstract

Financial frictions may prevent entrepreneurs from undertaking projects requiring large upfront investments with uncertain outcomes. By forming joint ventures entrepreneurs can overcome fixed costs and diversify risk. To provide evidence on the role of joint ventures I use historical data on slave trips from Africa to the Americas and document that slave owners who experienced an unexpected negative outcome (failed trip) were less likely to undertake another venture in the subsequent period. However, owners who diversified risk by investing in multiple trips were less responsive to negative shocks. The data also show that, compared with other slave trading countries, joint ventures were more common in Britain. I develop a model of joint venture formation and calibrate it to the historical data to quantify the output gains from this institutional arrangement.