Partnership dissolution, complementarity, and investment incentives

Jianpei Li and Elmar Wolfstetter

Oxford Economic Papers, 2010, vol. 62, issue 3, 529-552

Abstract: Partnerships form in order to take advantage of complementary skills; however, new opportunities may arise that make some partners' skills useless. We analyse partnerships that anticipate possible dissolution under the most commonly advised and widely used dissolution rule known as 'buy--sell provision'. We find that this rule assures neither ex post efficient dissolutions nor ex ante efficient investments. We also discuss whether renegotiations, supplementing the buy--sell provision with the right to veto, or allowing the uninformed partner to set the dissolution price may restore efficiency, and whether pre-emptive requests for dissolution occur in equilibrium. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

Date: 2010
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Working Paper: Partnership Dissolution, Complementarity, and Investment Incentives (2004)
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