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Efficient partnership dissolution under buy-sell clauses

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  • María Angeles de Frutos

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  • Thomas Kittsteiner

Abstract

When a partnership comes to an end, partners have to determine the terms of the dissolution. A well known way to do so is by enforcing a buy-sell clause. Under its rules one party offers a price for the partnership and the other party chooses whether to sell her share or buy her partner´s share at this price. It is well known that in a model with private valuations this dissolution rule may generate inefficient allocations. However, we show that if partners negotiate for the advantage of being chooser, then buy-sell clauses result in an ex-post efficient outcome. We argue that this endogenous selection of the proposer is consistent with how buysell clauses are drafted in practice. For an example with interdependent valuations, we further show that the buy-sell clause can perform better than an auction.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we072816.

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Date of creation: Dec 2006
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Handle: RePEc:cte:werepe:we072816

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  1. Reinhilde Veugelers & Katrien Kesteloot, 1996. "Bargained shares in joint ventures among asymmetric partners: Is the matthew effect catalyzing?," Journal of Economics, Springer, Springer, vol. 64(1), pages 23-51, February.
  2. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(3), pages 427-454, June.
  3. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(2), pages 265-281, April.
  4. Kittsteiner, Thomas, 2003. "Partnerships and double auctions with interdependent valuations," Games and Economic Behavior, Elsevier, Elsevier, vol. 44(1), pages 54-76, July.
  5. Engelbrecht-Wiggans Richard, 1994. "Auctions with Price-Proportional Benefits to Bidders," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(3), pages 339-346, May.
  6. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," Les Cahiers de Recherche 750, HEC Paris.
  7. Benny Moldovanu, 2002. "How to Dissolve a Partnership," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 158(1), pages 66-, March.
  8. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  9. de Frutos, M. Angeles, 2000. "Asymmetric Price-Benefits Auctions," Games and Economic Behavior, Elsevier, Elsevier, vol. 33(1), pages 48-71, October.
  10. Preston McAfee, R., 1992. "Amicable divorce: Dissolving a partnership with simple mechanisms," Journal of Economic Theory, Elsevier, Elsevier, vol. 56(2), pages 266-293, April.
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Cited by:
  1. Ettinger, David, 2008. "Auctions and shareholdings," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/5431, Paris Dauphine University.
  2. Kittsteiner, Thomas & Ockenfels, Axel & Trhal, Nadja, 2012. "Partnership dissolution mechanisms in the laboratory," Economics Letters, Elsevier, Elsevier, vol. 117(2), pages 394-396.
  3. Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization, EconWPA 0509007, EconWPA.
  4. Landeo, Claudia & Spier, Kathryn, 2013. "Shotgun Mechanisms for Common-Value Partnerships: The Unassigned-Offeror Problem," Working Papers 2013-10, University of Alberta, Department of Economics.
  5. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer, Springer, vol. 18(2), pages 127-150, June.
  6. Stefano Galavotti & Nozomu Muto & Daisuke Oyama, 2011. "On efficient partnership dissolution under ex post individual rationality," Economic Theory, Springer, Springer, vol. 48(1), pages 87-123, September.
  7. Li, Jianpei, 2009. "Partnership Dissolution and Proprietary Information," MPRA Paper 12505, University Library of Munich, Germany.
  8. Jianpei Li & Elmar G. Wolfstetter, 2004. "Partnership Dissolution, Complementarity, and Investment Incentives," CESifo Working Paper Series 1325, CESifo Group Munich.
  9. Wasser, Cédric, 2013. "Bilateral k+1-price auctions with asymmetric shares and values," Games and Economic Behavior, Elsevier, Elsevier, vol. 82(C), pages 350-368.
  10. John Turner, 2013. "Dissolving (in)effective partnerships," Social Choice and Welfare, Springer, Springer, vol. 41(2), pages 321-335, July.
  11. Richard R. W. Brooks & Claudia M. Landeo & Kathryn E. Spier, 2010. "Trigger happy or gun shy? Dissolving common-value partnerships with Texas shootouts," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 649-673.
  12. David Ettinger, 2008. "Auctions and shareholdings," Post-Print, HAL hal-00701303, HAL.
  13. Jianpei Li & Yi Xue & Weixing Wu, 2013. "Partnership dissolution and proprietary information," Social Choice and Welfare, Springer, Springer, vol. 40(2), pages 495-527, February.
  14. Thomas F. Hellmann & Veikko Thiele, 2012. "A Theory of the Firm based on Partner Displacement," NBER Working Papers 18495, National Bureau of Economic Research, Inc.

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