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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.

Suggested Citation

  • Howard Bodenhorn, 2002. "Partnership and Hold-Up in Early America," NBER Working Papers 8814, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8814
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    References listed on IDEAS

    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. repec:hrv:faseco:30728046 is not listed on IDEAS
    3. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. Demsetz, Harold, 1988. "The Theory of the Firm Revisited," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 141-161, Spring.
    5. 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.
    6. Raghuram G. Rajan & Luigi Zingales, 1998. "The Governance of the New Enterprise," CRSP working papers 487, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. 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.
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    Cited by:

    1. Naomi Lamoreaux & Jean-Laurent Rosenthal, 2004. "Corporate Governance and the Plight of Minority Shareholders in the United States Before the Great Depression," NBER Working Papers 10900, National Bureau of Economic Research, Inc.
    2. Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2006. "Corporate Governance and the Plight of Minority Shareholders in the United States before the Great Depression," NBER Chapters,in: Corruption and Reform: Lessons from America's Economic History, pages 125-152 National Bureau of Economic Research, Inc.
    3. Howard Bodenhorn, 2011. "Partnership fragility and credit costs," NBER Working Papers 16689, National Bureau of Economic Research, Inc.
    4. Ran Abramitzky & Zephyr Frank & Aprajit Mahajan, 2009. "Inside the Black Box: Partnerships in Rio de Janeiro, 1870-1891," Discussion Papers 08-044, Stanford Institute for Economic Policy Research.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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