Termination clauses in partnerships

Stefano Comino, Antonio Nicolò, Piero Tedeschi

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)718-732
Number of pages14
JournalEuropean Economic Review
Volume54
Issue number5
DOIs
Publication statusPublished - Jul 2010

Keywords

  • Hold-up
  • Joint ventures
  • Partnerships
  • Termination clauses

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