Partnership Dissolution, Complementarity, and Investment Incentives

29 Pages Posted: 19 Nov 2004

See all articles by Jianpei Li

Jianpei Li

Humboldt University of Berlin

Elmar Wolfstetter

Humboldt University of Berlin - Faculty of Economics; Korea University - College of Economics and Commerce; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 2004

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.

JEL Classification: C78, D82, J12, K12, L24

Suggested Citation

Li, Jianpei and Wolfstetter, Elmar G., Partnership Dissolution, Complementarity, and Investment Incentives (November 2004). CESifo Working Paper Series No. 1325. Available at SSRN: https://ssrn.com/abstract=599881

Jianpei Li

Humboldt University of Berlin ( email )

Unter den Linden 6
D-10178 Berlin, AK 10099
Germany
0049 30 2093 5657 (Phone)

HOME PAGE: http://www.wiwi.hu-berlin.de/wt1/staff/Jianpei-li/jianpei-li.htm

Elmar G. Wolfstetter (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

Institut für Wirtschaftstheorie I
Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652/3 (Phone)
+49 30 2093 5619 (Fax)

HOME PAGE: http://www2.hu-berlin.de/wt1wo/staff/wolfstetter/index.html

Korea University - College of Economics and Commerce ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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