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Termination Clauses in Partnerships

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Author Info
Stefano Comino (Dipartimento di Economia, Università di Trento)
Antonio Nicolò (Dipartimento di Scienze Economiche ''M. Fanno'', Università di Padova)
Piero Tedeschi (Dipartimento di Statistica, Università degli Studi di Milano - Bicocca)

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Abstract

In this paper, we prove that two firms can choose 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 non-contractible efforts (investments) to decrease the probability of failure. Therefore, the absence of a termination clause works as a ``discipline device''\ that mitigates the moral hazard 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.

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Publisher Info
Paper provided by EconWPA in its series Industrial Organization with number 0509007.

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Length: 35 pages
Date of creation: 14 Sep 2005
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Handle: RePEc:wpa:wuwpio:0509007

Note: Type of Document - pdf; pages: 35
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Web page: http://129.3.20.41

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Related research
Keywords: moral hazard; 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

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    Other versions:
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