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Partnership Dissolution, Complementarity, and Investment Incentives

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Author Info
Jianpei Li (Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin, Spandauer Str. 1, 10099 Berlin, Germany)
Elmar Wolfstetter (Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin, Spandauer Str. 1, 10099 Berlin, Germany)

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Abstract

We study a partnership that anticipates its possible dissolution. In our model, partnerships form in order to take advantage of complementary skills; although, new opportunities may arise that make partners' skills useless. We characterize the optimal, incentive compatible partnership contract that can be implemented by a simple call option, and then analyze the commonly used buy--sell provision. We show that this dissolution rule gives rise to inefficiency, either in the form of excessive dissolutions combined with underinvestment or efficient dissolutions combined with overinvestment. However, supplementing the buy--sell provision with the right to veto may restore efficiency.

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Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 12.

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Date of creation: Jun 2004
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Handle: RePEc:trf:wpaper:12

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Joseph Farrell and Suzanne Scotchmer., 1986. "Partnerships," Economics Working Papers 8616, University of California at Berkeley.
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  3. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May. [Downloadable!] (restricted)
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  4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  5. Peter Cramton & Robert Gibbons & Paul Klemperer, 1987. "Dissolving a Partnership Efficiently," Papers of Peter Cramton 87econ, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998. [Downloadable!]
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  6. Philippe Jehiel & Ady Pauzner, 2006. "Partnership Dissolution with Interdependent Values," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 1-22, Spring.
  7. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April. [Downloadable!] (restricted)
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  8. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July. [Downloadable!] (restricted)
  9. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," Les Cahiers de Recherche 750, HEC Paris. [Downloadable!]
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  10. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  11. Maria Angeles de Frutos & Thomas Kittsteiner, 2004. "Efficient partnership dissolution under buy/sell clauses," Bonn Econ Discussion Papers bgse1_2004, University of Bonn, Germany, revised Jul 2004. [Downloadable!]
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  12. Kittsteiner, Thomas, 2003. "Partnerships and double auctions with interdependent valuations," Games and Economic Behavior, Elsevier, vol. 44(1), pages 54-76, July. [Downloadable!] (restricted)
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  13. Preston McAfee, R., 1992. "Amicable divorce: Dissolving a partnership with simple mechanisms," Journal of Economic Theory, Elsevier, vol. 56(2), pages 266-293, April. [Downloadable!] (restricted)
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  1. Bernhard Ganglmair, 2008. "Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking," JEPS Working Papers 08-001, JEPS. [Downloadable!]
  2. Li, Jianpei, 2009. "Partnership Dissolution and Proprietary Information," MPRA Paper 12505, University Library of Munich, Germany. [Downloadable!]
  3. Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization 0509007, EconWPA. [Downloadable!]
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