Describe five tools that firms can use to reduce the threat of cheating in strategic alliances

What will be an ideal response?

The five tools firms can use to reduce the threat of cheating in strategic alliances are contracts, equity investments, firm reputations, joint ventures, and trust.
Contracts. One way to avoid cheating in strategic alliances is for parties to an alliance to anticipate the ways in which cheating may occur (including adverse selection, moral hazard, and holdup) and to write explicit contracts that define legal liability if cheating does occur. Writing these contracts, together with the close monitoring of contractual compliance and the threat of legal sanctions, can reduce the probability of cheating.
Equity investments. The effectiveness of contracts can be enhanced by having partners in an alliance make equity investments in each other so that if one of the partners to an alliance cheats, they will be negatively impacted through their equity investment in their partner.
Firm reputations. Information about an alliance partner that has cheated is likely to become widely known. A firm with a reputation as a cheater is not likely to be able to develop strategic alliances with other partners in the future, despite any special resources or capabilities that it might be able to bring to an alliance. In this way, cheating in a current alliance may foreclose opportunities for developing valuable alliances. For this reason, firms may decide not to cheat in their current alliances.
Joint ventures. Creating a separate legal entity in which alliance partners invest and from whose profits they earn returns on their investments reduces some of the risks of cheating in strategic alliances. When a joint venture is created, the ability of partners to earn returns on their investments depends on the economic success of the joint venture. Partners in joint ventures have limited interests in behaving in ways that hurt the performance of the joint venture because such behaviors end up hurting themselves. Moreover, unlike reputational consequences of cheating, cheating in a joint venture does not just foreclose future alliance
opportunities, it can hurt the cheating firm in the current period as well.
Trust. Trust, in combination with contracts, can help reduce the threat of cheating. More important, trust may enable partners to explore exchange opportunities that they could not explore if only legal and economic organizing mechanisms were in place.