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Partnership and Hold-Up in Early America

  • Howard Bodenhorn

Williamson (1985) argues that individuals form firms with specific internal governance structures to mitigate certain types of opportunistic behavior that may inhibit efficient contracting between independent contractors. But once firms are established, the individuals that comprise them may still act opportunistically. This paper investigates a specific historical case: the partnership in early America. Partnerships grappled with information-based problems, such as adverse selection, moral hazard, as well as ex ante and ex post contractual opportunism, including hold-up. Asset specificity and imperfect contracts made partnerships vulnerable to hold-up, especially when one partner invested in a sunk asset that enhanced the productivity of all other partners. This was a particular problem facing existing partners when they invited a new partner into their firm. Empirical evidence from the mid-nineteenth century suggests that individuals mitigated the effects of pre- and post-contractual opportunism by forming partnerships with others of similar age, productivity, and capital. This finding brings the traditional interpretation of partnerships as mentor-prot‚g‚ relationships into question.

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File URL: http://www.nber.org/papers/w8814.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8814.

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Date of creation: Feb 2002
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Handle: RePEc:nbr:nberwo:8814
Note: DAE
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  1. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  2. Raghuram G. Rajan & Luigi Zingales, 2000. "The Governance of the New Enterprise," NBER Working Papers 7958, National Bureau of Economic Research, Inc.
  3. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  4. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 141-61, Spring.
  5. Lamoreaux, Naomi R, 1998. "Partnerships, Corporations, and the Theory of the Firm," American Economic Review, American Economic Association, vol. 88(2), pages 66-71, May.
  6. Conley, Timothy G. & Galenson, David W., 1998. "Nativity and Wealth in Mid-Nineteenth-Century Cities," The Journal of Economic History, Cambridge University Press, vol. 58(02), pages 468-493, June.
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