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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)

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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File URL: http://128.118.178.162/eps/io/papers/0509/0509007.pdf
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Bibliographic 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
Date of revision:
Handle: RePEc:wpa:wuwpio:0509007

Note: Type of Document - pdf; pages: 35
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Web page: http://128.118.178.162

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Keywords: moral hazard; termination clauses; partnerships; joint ventures;

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References

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Citations

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Cited by:
  1. 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.
  2. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer, vol. 18(2), pages 127-150, June.
  3. Berardi, Nicoletta & Seabright, Paul, 2010. "Joint Ventures as a Commitment Device Against Lobbies," CEPR Discussion Papers 7714, C.E.P.R. Discussion Papers.

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