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Termination Clauses in Partnerships

  • Stefano Comino

    (Dipartimento di Economia, Università di Trento)

  • Antonio Nicolò

    (Dipartimento di Scienze Economiche ''M. Fanno'', Università di Padova)

  • Piero Tedeschi

    (Dipartimento di Statistica, Università degli Studi di Milano - Bicocca)

In this paper, we prove that two firms can choose not to include a termination clause in their partnership contract, thus inducing a costly termination in case of failure of the joint project. This ex-post inefficiency induces partners to exert large non-contractible efforts (investments) to decrease the probability of failure. Therefore, the absence of a termination clause works as a ``discipline device''\ that mitigates the moral hazard problem within the partnership. We show that writing a contract without a termination clause is a credible commitment even when partners can add such a clause in the contract in any moment of their relationship.

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Paper provided by EconWPA in its series Industrial Organization with number 0509007.

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Length: 35 pages
Date of creation: 14 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpio:0509007
Note: Type of Document - pdf; pages: 35
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