Dissolving (in)effective partnerships

This paper studies the problem of partnership dissolution in the context of asymmetric information. Past work has shown that ownership share endowments, interdependence of partners’ valuations, and asymmetric control all affect the possibility of efficient dissolution. In this paper, I argue that the effectiveness of the existing partnership in generating value, which has not been studied, is of first-order importance for efficient implementation. I show, in a novel class of “cooperative” partnerships characterized by ex ante interdependence of valuations, that effectiveness is significantly more important than share endowments. Intuitively, as the effectiveness of cooperation between partners (and thus partnership value) increases, the gains from dissolving decrease but the informational rents remain constant, so efficient dissolution is unambiguously more difficult to achieve. For sufficiently high effectiveness, efficient dissolution is Pareto-improving but is impossible for any pattern of share endowments. For sufficiently low effectiveness, however, efficient dissolution is possible for all patterns of shares. The existence of efficient implementation depends on share endowments only for moderately effective partnerships. This helps to explain the persistence of equalshares partnerships and the prevalence of “Texas Shootout” dissolution mechanisms in practice. JEL Codes: C72, D82, L14