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Termination Clauses in Partnerships

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Author Info
Stefano Comino
Antonio Nicolò
Piero Tedeschi

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Abstract

In this paper, we prove that two firms may prefer not to include a termination clause in their partnership contract, thus inducing a costly termination in case of failure of the joint project. This ex-post inefficiency induces partners to exert large levels of non-contractible efforts (investments) in order to decrease the probability of failure. Therefore, the absence of a termination clause works as a "discipline device" that mitigates the hold-up problem within the partnership. We show that writing a contract without a termination clause is a credible commitment even when partners can add such a clause in the contract in any moment of their relationship. Comparative statics analysis suggests that contracts lacking a termination clause are suited to alliances in R&D, when partners are not rivals or when they have strong technological complementarities.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20060505.pdf
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Publisher Info
Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20060505.

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Length: 41 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:mis:wpaper:20060505

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Related research
Keywords: hold-up; termination clauses; partnerships; joint ventures;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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