The Buy - Sell Provision , Investigation Costs , and Preemptive Offers - Theory and Experimental Evidence ∗

This paper studies how a well-informed partner strategically dissolves a partnership by proposing a buy-sell provision preemptively and deters an ill-informed partner from investigating the business. Our experimental evidence shows that the presence of an investigation cost has a negative effect on the responders’ payoff as well as on social surplus and allocation efficiency. However, the proposers do not benefit substantially from this information asymmetry. We find that responders are more reluctant to buy than to sell: as a result, the proposers attempt to prevent investigation less frequently, less intensively and less successfully than predicted. Our estimates using a noisy best-reply model lead us to conclude that proposers follow a best-reply strategy given responder behavior.