Partnership Dissolution, Complementarity, and Investment Incentives

Jianpei Li and Elmar Wolfstetter

No 1325, CESifo Working Paper Series from CESifo

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.

Date: 2004
New Economics Papers: this item is included in nep-bec and nep-law
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Citations: View citations in EconPapers (3)

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Journal Article: Partnership dissolution, complementarity, and investment incentives (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1325

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