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Termination Clauses in Partnerships

Stefano Comino (), Antonio Nicolo' () and Piero Tedeschi ()

No 20060505, Working Papers from Università degli Studi di Milano-Bicocca, Dipartimento di Statistica

Abstract: In this paper, we prove that two firms may prefer 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 levels of non-contractible efforts (investments) in order to decrease the probability of failure. Therefore, the absence of a termination clause works as a "discipline device" that mitigates the hold-up 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. Comparative statics analysis suggests that contracts lacking a termination clause are suited to alliances in R&D, when partners are not rivals or when they have strong technological complementarities.

Keywords: hold-up; termination clauses; partnerships; joint ventures (search for similar items in EconPapers)
JEL-codes: D82 K12 L24 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2006-05
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (3) Track citations by RSS feed

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http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20060505.pdf First version, May 2006 (application/pdf)

Related works:
Journal Article: Termination clauses in partnerships (2010) Downloads
Working Paper: Termination Clauses in Partnerships (2005) Downloads
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