Partnership Dissolution, Complementarity, and Investment Incentives
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.
|Date of creation:||2004|
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- Kittsteiner, Thomas, 2000.
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Sonderforschungsbereich 504 Publications
01-15, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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Papers of Peter Cramton
87econ, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
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Bonn Econ Discussion Papers
bgse1_2004, University of Bonn, Germany, revised Jul 2004.
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