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Partnership Dissolution with Cash-Constrained Agents

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Abstract

When partnerships come to an end, partners must find a way to efficiently reallocate the commonly owned assets to those who value them the most. This requires that the aforementioned members possess enough financial resources to buy out the others’ shares. I investigate ex post efficient partnership dissolution when agents are ex post cash constrained. I derive necessary and sufficient conditions for ex post efficient partnership dissolution with Bayesian (resp. dominant strategy) incentive compatible, interim individually rational, ex post (resp. ex ante) budget balanced and ex post cash-constrained mechanisms. Ex post efficient dissolution is more likely to be feasible when agents with low (resp. large) cash resources own more (resp. less) initial ownership rights. Furthermore, I propose a simple auction to implement the optimal mechanism. Finally, I investigate second-best mechanisms when cash constraints are such that ex post efficient dissolution is not attainable.

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  • Guillaume Pommey, 2021. "Partnership Dissolution with Cash-Constrained Agents," CEIS Research Paper 514, Tor Vergata University, CEIS, revised 10 Oct 2021.
    • Handle: RePEc:rtv:ceisrp:514
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    1. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-632, May.
    2. Peter C. Cramton, 1995. "Money Out of Thin Air: The nationwide Narrowband pcs Auction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 267-343, June.
    3. , & ,, 2006. "Revenue comparisons for auctions when bidders have arbitrary types," Theoretical Economics, Econometric Society, vol. 1(1), pages 95-118, March.
    4. Philippe Aghion & Patrick Bolton & Jean Tirole, 2004. "Exit Options in Corporate Finance: Liquidity versus Incentives," Review of Finance, Springer, vol. 8(3), pages 327-353.
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    Keywords

    Mechanism design; Partnership; Ex post cash constraints; Property rights theory.;
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