Underreporting in Revenue-Sharing Contracts: Evidence from the Chinese Film Industry

ABSTRACT Revenue-sharing contracts allow firms that are distant from their target markets to leverage sellers' local expertise. Although these contracts align incentives in operational decisions, they also introduce the potential for sellers to underreport revenues. We analyze film-level box office data from 7,309 Chinese cinemas and find that cinemas report significantly lower revenues for foreign films than for comparable domestic films, consistent with foreign producers being less able to monitor reported revenues due to geographic distance. The underreporting of foreign films is lower in cities with widespread mobile payments, in multi-unit cinemas, and when foreign films have more predictable revenues, suggesting institutional factors that increase detection likelihood can mitigate underreporting. Further tests indicate the lower reported box office revenues of foreign films is not due to government intervention. Our findings provide novel evidence of product-level misreporting under revenue-sharing contracts and offer insights on mitigating these risks in international markets. Data availability: Data are available via the sources specified in the paper. The authors greatly appreciate the data supplied by EntGroup (http://english.entgroup.com.cn/enbase.html) but are not able to share the data based on the agreement with Entgroup. JEL Classifications: F00; L82; M40.