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Partnership Dissolution, Complementarity, and Investment Incentives

  • Jianpei Li
  • Elmar G. Wolfstetter

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 CESifo Group Munich in its series CESifo Working Paper Series with number 1325.

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Date of creation: 2004
Date of revision:
Handle: RePEc:ces:ceswps:_1325
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  1. 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.
  2. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  3. Kittsteiner, Thomas, 2003. "Partnerships and double auctions with interdependent valuations," Games and Economic Behavior, Elsevier, vol. 44(1), pages 54-76, July.
  4. Peter Cramton & Robert Gibbons & Paul Klemperer, 1985. "Dissolving a Partnership Efficiently," Working papers 406, Massachusetts Institute of Technology (MIT), Department of Economics.
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