Why reputation favors joint ventures over vertical and horizontal integration - A simple model

This paper investigates the effect of reputation in a model where two parties make noncontractable contributions to an economic undertaking. It is shown that the optimal allocation of ownership between the parties is more similar in a repeated than in a one shot version of the model. This implies that unified ownership and reputation are substitutes. Low discount rates and repeated investment decisions thus favor subcontracting and joint venture arrangements of the type commonly observed in Japanese industry, while full integration is more likely to be optimal when reputational forces are weak.