Termination Clauses in Partnerships

Stefano Comino (), Antonio Nicolo' () and Piero Tedeschi
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Piero Tedeschi: Dipartimento di Statistica, Università degli Studi di Milano - Bicocca

Industrial Organization from EconWPA

Abstract: 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.

Keywords: moral hazard; termination clauses; partnerships; joint ventures (search for similar items in EconPapers)
JEL-codes: D82 K12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law
Date: 2005-09-14
Note: Type of Document - pdf; pages: 35
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http://129.3.20.41/eps/io/papers/0509/0509007.pdf (application/pdf)

Related works:
Working Paper: Termination Clauses in Partnerships (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0509007

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