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Termination Clauses in Partnerships

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  • Stefano Comino
  • Antonio Nicolò
  • Piero Tedeschi

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
File Function: First version, May 2006
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Bibliographic 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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Keywords: hold-up; termination clauses; partnerships; joint ventures;

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References

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Citations

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Cited by:
  1. Berardi, Nicoletta & Seabright, Paul, 2010. "Joint Ventures as a Commitment Device Against Lobbies," CEPR Discussion Papers 7714, C.E.P.R. Discussion Papers.
  2. Valeria Gattai & Piergiovanna Natale, 2012. "What makes a joint venture: micro evidence from Sino-Italian contracts," Working Papers 218, University of Milano-Bicocca, Department of Economics, revised Jan 2012.
  3. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer, vol. 18(2), pages 127-150, June.

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