Dissolving (In)Effective Partnerships
John L. Turner
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
June 12, 2012
This paper studies the problem of partnership dissolution in the context of asymmetric information. Past work shows that the initial share allocation, interdependence of partners’ valuations, and asymmetric control all affect the possibility of efficient dissolution. In this paper, I show, in a novel class of “cooperative” partnerships characterized by ex ante interdependence of valuations, that effectiveness is significantly more important than the initial share allocation. Intuitively, as the effectiveness of cooperation between partners (and thus partnership value) increases, the gains from dissolving decrease but the informational rents remain constant, so efficient dissolution is more difficult to achieve. For sufficiently high effectiveness, efficient dissolution is impossible for any initial share allocation. For sufficiently low effectiveness, however, efficient dissolution is possible for all initial share allocations. The possibility of efficient bargaining depends on the initial share allocation only for moderately effective partnerships.
Number of Pages in PDF File: 18
Keywords: Mechanism design, trading, dissolution, partnerships
JEL Classification: C72, D82, L14
Date posted: July 24, 2008 ; Last revised: June 20, 2012
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