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Termination Clauses in Partnerships

Author

Listed:
  • Stefano Comino

    (Dipartimento di Economia, Università di Trento)

  • Antonio Nicolò

    (Dipartimento di Scienze Economiche ''M. Fanno'', Università di Padova)

  • Piero Tedeschi

    (Dipartimento di Statistica, Università degli Studi di Milano - Bicocca)

Abstract

In this paper, we prove that two firms can choose not to include a termination clause in their partnership contract, thus inducing a costly termination in case of failure of the joint project. This ex-post inefficiency induces partners to exert large non-contractible efforts (investments) to decrease the probability of failure. Therefore, the absence of a termination clause works as a ``discipline device''\ that mitigates the moral hazard problem within the partnership. We show that writing a contract without a termination clause is a credible commitment even when partners can add such a clause in the contract in any moment of their relationship.

Suggested Citation

  • Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization 0509007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:0509007
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    References listed on IDEAS

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    Cited by:

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    3. Gattai, Valeria & Natale, Piergiovanna, 2013. "What makes a joint venture: Micro-evidence from Sino-Italian contracts," Review of Financial Economics, Elsevier, vol. 22(4), pages 194-205.
    4. Alistair Wilson & Hong Wu, 2014. "Dissolution of Partnerships in Infinitely Repeated Games," Working Paper 532, Department of Economics, University of Pittsburgh, revised Aug 2014.
    5. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 18(2), pages 127-150, June.
    6. Wilson, Alistair J. & Wu, Hong, 2017. "At-will relationships: How an option to walk away affects cooperation and efficiency," Games and Economic Behavior, Elsevier, vol. 102(C), pages 487-507.
    7. Goetz, Renan & Yatsenko, Yuri & Hritonenko, Natali & Xabadia, Angels & Abdulai, Awudu, 2019. "The dynamics of productive assets, contract duration and holdup," Mathematical Social Sciences, Elsevier, vol. 97(C), pages 24-37.

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    More about this item

    Keywords

    moral hazard; termination clauses; partnerships; joint ventures;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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