Partnership Dissolution, Complementarity, and Investment Incentives

Jianpei Li and Elmar Wolfstetter ()
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Jianpei Li: Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin, Spandauer Str. 1, 10099 Berlin, Germany

No 12, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We study a partnership that anticipates its possible dissolution. In our model, partnerships form in order to take advantage of complementary skills; although, new opportunities may arise that make partners' skills useless. We characterize the optimal, incentive compatible partnership contract that can be implemented by a simple call option, and then analyze the commonly used buy--sell provision. We show that this dissolution rule gives rise to inefficiency, either in the form of excessive dissolutions combined with underinvestment or efficient dissolutions combined with overinvestment. However, supplementing the buy--sell provision with the right to veto may restore efficiency.

JEL-codes: D82 C78 J12 K12 L24 (search for similar items in EconPapers)
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Date: Written
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Related works:
Working Paper: Partnership Dissolution, Complementarity, and Investment Incentives (2004)
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