The Cozzolino Rent as an Efficient Tool of Bargaining for the Terms of Shared Financing of a Project with a Probabilistic Outcome

An analysis is presented of equilibrium bargaining solutions to the problem of the working interest distribution in a risky project amongst co-investors whose preferences are described by the Cozzolino formula. Atypical project could be an oil or gas exploration venture. It is shown that any Pareto-efficient distribution of the project cash flows can be achieved by dividing the working interest among the partners proportionally to individual risk tolerance values, which is equivalent to the maximization of a synergetic valuation measure that we propose to call the Cozzolino Rent. This Cozzolino Rent then can be re-distributed among the partners according to their bargaining power. Applications of the proposed approach to the group financing of ventures of various complexity are presented including projects with simple binary outcome and complex projects that require managing several inter-related risky assets as real options.