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Partnership fragility and credit costs

  • Howard Bodenhorn

Economic teams, including the business partnership, are created to exploit gains from cooperation, but teams also fall prey to shirking and other opportunistic behaviors, which lead to their dissolution. If team production is partly financed with debt, the untimely dissolution of partnerships exposes creditors to default risks that they will price into debt contracts. This paper explores these two features of the nineteenth-century business partnership and finds: (1) partnerships were short-lived teams (two years or less, on average) and larger partnerships were shorter-lived yet; and (2) compared to proprietorship, partnerships paid higher interest rates on short-term debt, after controlling for loan size, maturity, and other observable features. Although there were potential gains from team production, potential opportunism raised the costs of partnerships.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16689.

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Date of creation: Jan 2011
Date of revision:
Handle: RePEc:nbr:nberwo:16689
Note: DAE
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  1. Wang, Ta-Chen, 2008. "Banks, Credit Markets, and Early American Development: A Case Study of Entry and Competition," The Journal of Economic History, Cambridge University Press, vol. 68(02), pages 438-461, June.
  2. Bodenhorn, Howard, 2007. "Usury ceilings and bank lending behavior: Evidence from nineteenth century New York," Explorations in Economic History, Elsevier, vol. 44(2), pages 179-202, April.
  3. Graeme G. Acheson & John D. Turner, 2006. "The impact of limited liability on ownership and control: Irish banking, 1877-1914 -super-1," Economic History Review, Economic History Society, vol. 59(2), pages 320-346, 05.
  4. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law and Finance: why Does Legal Origin Matter?," NBER Working Papers 9379, National Bureau of Economic Research, Inc.
  5. Howard Bodenhorn, 2002. "Partnership and Hold-Up in Early America," NBER Working Papers 8814, National Bureau of Economic Research, Inc.
  6. Bodenhorn, Howard, 1999. "An Engine of Growth: Real Bills and Schumpeterian Banking in Antebellum New York," Explorations in Economic History, Elsevier, vol. 36(3), pages 278-302, July.
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