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Efficient partnership dissolution under buy-sell clauses

  • Frutos, María Ángeles de
  • Kittsteiner, Thomas

When a partnership comes to an end, partners have to determine the terms of the dissolution. A well known way to do so is by enforcing a buy-sell clause. Under its rules one party offers a price for the partnership and the other party chooses whether to sell her share or buy her partner´s share at this price. It is well known that in a model with private valuations this dissolution rule may generate inefficient allocations. However, we show that if partners negotiate for the advantage of being chooser, then buy-sell clauses result in an ex-post efficient outcome. We argue that this endogenous selection of the proposer is consistent with how buysell clauses are drafted in practice. For an example with interdependent valuations, we further show that the buy-sell clause can perform better than an auction.

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File URL: http://e-archivo.uc3m.es/bitstream/handle/10016/701/we0728161.pdf?sequence=1
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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we072816.

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Date of creation: Dec 2006
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Handle: RePEc:cte:werepe:we072816
Contact details of provider: Web page: http://www.eco.uc3m.es/

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  1. Reinhilde Veugelers & Katrien Kesteloot, 1996. "Bargained shares in joint ventures among asymmetric partners: Is the matthew effect catalyzing?," Journal of Economics, Springer, vol. 64(1), pages 23-51, February.
  2. Benny Moldovanu, 2002. "How to Dissolve a Partnership," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(1), pages 66-, March.
  3. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," Les Cahiers de Recherche 750, HEC Paris.
  4. de Frutos, M. Angeles, 2000. "Asymmetric Price-Benefits Auctions," Games and Economic Behavior, Elsevier, vol. 33(1), pages 48-71, October.
  5. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  6. Kittsteiner, Thomas, 2003. "Partnerships and double auctions with interdependent valuations," Games and Economic Behavior, Elsevier, vol. 44(1), pages 54-76, July.
  7. Jeremy Bulow & Ming Huang & Paul Klemperer, 1996. "Toeholds and Takeovers," Finance 9608001, EconWPA.
  8. Preston McAfee, R., 1992. "Amicable divorce: Dissolving a partnership with simple mechanisms," Journal of Economic Theory, Elsevier, vol. 56(2), pages 266-293, April.
  9. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  10. Engelbrecht-Wiggans Richard, 1994. "Auctions with Price-Proportional Benefits to Bidders," Games and Economic Behavior, Elsevier, vol. 6(3), pages 339-346, May.
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