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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
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Handle: RePEc:ces:ceswps:_1325
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  1. María-Angeles de Frutos & Thomas Kittsteiner, 2008. "Efficient partnership dissolution under buy-sell clauses," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 184-198.
  2. Peter Cramton & Robert Gibbons & Paul Klemperer, 1985. "Dissolving a Partnership Efficiently," Working papers 406, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Kittsteiner, Thomas, 2000. "Partnerships and Double Auctions with Interdependent Valuations," Sonderforschungsbereich 504 Publications 01-15, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  4. 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.
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