Termination Clauses in Partnerships
Stefano Comino (),
Antonio Nicolo' () and
Piero Tedeschi ()
Industrial Organization from EconWPA
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
Note: Type of Document - pdf; pages: 35
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Journal Article: Termination clauses in partnerships (2010)
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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