Working Paper: NBER ID: w8814
Authors: Howard Bodenhorn
Abstract: Williamson (1985) argues that individuals form firms with specific internal governance structures to mitigate certain types of opportunistic behavior that may inhibit efficient contracting between independent contractors. But once firms are established, the individuals that comprise them may still act opportunistically. This paper investigates a specific historical case: the partnership in early America. Partnerships grappled with information-based problems, such as adverse selection, moral hazard, as well as ex ante and ex post contractual opportunism, including hold-up. Asset specificity and imperfect contracts made partnerships vulnerable to hold-up, especially when one partner invested in a sunk asset that enhanced the productivity of all other partners. This was a particular problem facing existing partners when they invited a new partner into their firm. Empirical evidence from the mid-nineteenth century suggests that individuals mitigated the effects of pre- and post-contractual opportunism by forming partnerships with others of similar age, productivity, and capital. This finding brings the traditional interpretation of partnerships as mentor-prot‚g‚ relationships into question.
Keywords: No keywords provided
JEL Codes: L14; L22; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information-based problems (D83) | partnerships (L14) |
| sunk asset investment (G31) | holdup situations (D86) |
| perceived opportunism (D84) | partnership formation (L26) |
| selecting partners with similar characteristics (C52) | mitigated vulnerabilities (H84) |
| holdup phenomena (D86) | underinvestment (G31) |