Abstract
We show that when designing a partnership agreement partner firms may prefer not to specify how to allocate the commonly owned assets should there be an early termination of the contract. By not including such a clause, firms induce litigation before a Court with positive probability. Firms create this ex-post inefficiency in order to increase the levels of non-contractible investments, i.e. increase the ex-ante efficiency. The absence of an asset allocation clause works as a "discipline device" that mitigates the hold-up problem within the partnership. In our set-up, no other contract but that without an asset allocation clause can credibly create an ex-post inefficiency. © 2009 Elsevier B.V.
Original language | English |
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Pages (from-to) | 718-732 |
Number of pages | 14 |
Journal | European Economic Review |
Volume | 54 |
Issue number | 5 |
DOIs | |
Publication status | Published - Jul 2010 |
Keywords
- Hold-up
- Joint ventures
- Partnerships
- Termination clauses