Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

Abstract

Our paper tests a key prediction of property rights theory: that agents respond to marginal incentives embedded in property rights, when making non-contractible, revenue-enhancing investments. (Grossman and Hart, 1986; Hart and Moore, 1990). Using rich project-level data from the US film industry, we exploit variation in property right allocations, investment choices, and film revenues to test the distinctive aspects of property rights theory. Empirical tests of these key theoretical predictions have been relatively sparse due to the lack of appropriate data. The US film industry displays two distinct allocations of property rights, which differentially affect marginal returns on a particular class of investments. Studio-financed films are produced and distributed by studios which take in the lion’s share of revenue. In contrast, independent films are distributed by studios under revenue sharing agreements, which give studios 30-40% of the revenue stream. Under either regime, the allocation of scarce marketing resources is determined by and paid for by the studio. After accounting for the endogenous nature of property-right allocations, we find that studio-financed films receive superior marketing investments compared to independent films and that these investments fully mediate the positive effect of vertical integration on film revenues. As a result, this study contributes to the empirical literature on property rights by showing that both predicted linkages (from marginal returns to investment and from investment to revenue) exist in a single empirical setting.