Journal Article

Partnership dissolution, complementarity, and investment incentives

Jianpei Li and Elmar Wolfstetter

in Oxford Economic Papers

Volume 62, issue 3, pages 529-552
Published in print July 2010 | ISSN: 0030-7653
Published online September 2009 | e-ISSN: 1464-3812 | DOI: http://dx.doi.org/10.1093/oep/gpp030
Partnership dissolution, complementarity, and investment incentives

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  • Game Theory and Bargaining Theory
  • Firm Objectives, Organization, and Behaviour
  • Demographic Economics
  • Information, Knowledge, and Uncertainy
  • Contract Law

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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.

Keywords: D82; C78; J12; K12; L24

Journal Article.  7984 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Firm Objectives, Organization, and Behaviour ; Demographic Economics ; Information, Knowledge, and Uncertainy ; Contract Law

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