Kinship, Control, and Incentives

Opportunistic behavior can be resolved through contract or by adjusting the structure of ownership. Previous scholarship has focussed on economic factors that influence the trade-off between contract and ownership. We focus on the effect of a cultural factor -- kinship -- and hypothesize that the presence of kinship ties leads to a relative preference for contract over ownership as the way to resolve opportunistic behavior. This hypothesis is tested on a data set of Taiwanese direct investments in Mainland China. The results provide fairly strong support to the hypothesis.