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Partnership dissolution, complementarity, and investment incentives

  • Jianpei Li
  • Elmar Wolfstetter

Partnerships form in order to take advantage of complementary skills; however, new opportunities may arise that make some partners' skills useless. We analyse partnerships that anticipate possible dissolution under the most commonly advised and widely used dissolution rule known as 'buy--sell provision'. We find that this rule assures neither ex post efficient dissolutions nor ex ante efficient investments. We also discuss whether renegotiations, supplementing the buy--sell provision with the right to veto, or allowing the uninformed partner to set the dissolution price may restore efficiency, and whether pre-emptive requests for dissolution occur in equilibrium. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpp030
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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 62 (2010)
Issue (Month): 3 (July)
Pages: 529-552

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Handle: RePEc:oup:oxecpp:v:62:y:2010:i:3:p:529-552
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  1. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-32, May.
  2. Kittsteiner, Thomas, 2003. "Partnerships and double auctions with interdependent valuations," Games and Economic Behavior, Elsevier, vol. 44(1), pages 54-76, July.
  3. Banks, Jeffrey S. & Sobel, Joel., 1985. "Equilibrium Selection in Signaling Games," Working Papers 565, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. 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.
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