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Oxford Economic Papers Advance Access published online on September 23, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp030
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© Oxford University Press 2009 All rights reserved

Partnership dissolution, complementarity, and investment incentives

Jianpei Li* and Elmar Wolfstetter{dagger}

*University of International Business and Economics, East Huixin Street 10, 100029 Beijing, China, and Humboldt University at Berlin; e-mail: lijianpei2007{at}gmail.com
{dagger}Humboldt University at Berlin, Institute of Economic Theory I, Spandauer Str. 1, 10178 Berlin, Germany; e-mail: wolfstetter{at}gmail.com

JEL classifications: D82, C78, J12, K12, L24


  Abstract

Partnerships form in order to take advantage of complementary skills; however, new opportunities may arise that make some partners' skills useless. We analyse partnerships that anticipate possible dissolution under the most commonly advised and widely used dissolution rule known as ‘buy–sell provision’. We find that this rule assures neither ex post efficient dissolutions nor ex ante efficient investments. We also discuss whether renegotiations, supplementing the buy–sell provision with the right to veto, or allowing the uninformed partner to set the dissolution price may restore efficiency, and whether pre-emptive requests for dissolution occur in equilibrium.


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