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.
Tedeschi, P., Nicolò, A., Comino, S., Termination Clauses in Partnerships, <<EUROPEAN ECONOMIC REVIEW>>, 2010; 54 (Luglio): 718-732. [doi:10.1016/j.euroecorev.2009.12.007] [http://hdl.handle.net/10807/31108]
Termination Clauses in Partnerships
Tedeschi, Piero;
2010
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.
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