Termination clauses in partnerships
AbstractWe show that when designing a partnership agreement partner firms may prefer not to specify how to allocate the commonly owned assets should there be an early termination of the contract. By not including such a clause, firms induce litigation before a Court with positive probability. Firms create this ex-post inefficiency in order to increase the levels of non-contractible investments, i.e. increase the ex-ante efficiency. The absence of an asset allocation clause works as a "discipline device" that mitigates the hold-up problem within the partnership. In our set-up, no other contract but that without an asset allocation clause can credibly create an ex-post inefficiency.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 54 (2010)
Issue (Month): 5 (July)
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Hold-up Termination clauses Partnerships Joint ventures;
Other versions of this item:
- Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2006. "Termination Clauses in Partnerships," Working Papers 20060505, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica.
- Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization 0509007, EconWPA.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
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