Speculative partnership dissolution with auctions

The literature on partnership dissolution generally takes the dissolution decision as given and examines whether the outcome is efficient. A well-known result is that $$k+1$$ k + 1 -price auctions dissolve a partnership efficiently when the share structure is sufficiently close to equal. We extend the setup in two directions. First, we introduce complementarities by assuming a nontrivial continuation value of the partnership that is lost in case of dissolution. This makes inefficient breakups as well as continuation possible outcomes. Second, we assume that dissolution is not given, but must be triggered by a deliberate decision of at least one partner. This implies a signaling game, where calling for dissolution signals private information. We show that, in our extended setting, standard $$k+1$$ k + 1 -price auctions cannot dissolve a two-player equal-share partnership ex post efficiently. While allowing for veto or requiring consent does not help, adding a proper reserve to the winner’s bid auction restores efficiency. Copyright Springer-Verlag Berlin Heidelberg 2014