Partnership as Experimentation: Business Organization and Survival in Egypt, 1910–1949

90 Pages Posted: 24 May 2017 Last revised: 26 May 2017

See all articles by Cihan Artunç

Cihan Artunç

Middlebury College

Timothy W. Guinnane

Yale University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 1, 2017

Abstract

The relationship between legal forms of firm organization and economic development remains poorly understood. Recent research disputes the view that the joint-stock corporation played a crucial role in historical economic development, but retains the view that the costless firm dissolution implicit in non-corporate forms is detrimental to investment. We demonstrate the benefits of costless dissolution in an environment where potential business partners are not fully-informed. Using a multi-armed bandit model, we show that an experimentation mechanism creates a spike in dissolution rates early in firms’ lives, as less productive matches break down and agents look for better matches. We test the model’s predictions using a novel firm-level dataset comprising more than 12,000 enterprises established in Egypt between 1910 and 1949. Most partnerships dissolved within two years; afterwards, the risk of dissolution dropped to a lower, steady level. Corporations had much more uniform and lower attrition rates. Companies made up of partners who had been in business before also had flatter dissolution rates, confirming the link between learning and the early break-up of partnerships. The partnership reflected a trade-off between committing to a partner and sorting into potentially better matches.

Keywords: firm longevity, multi-armed bandits, business enterprise forms

JEL Classification: D21, D22, N15, O16, L26

Suggested Citation

Artunç, Cihan and Guinnane, Timothy W., Partnership as Experimentation: Business Organization and Survival in Egypt, 1910–1949 (May 1, 2017). Yale University Economic Growth Center Discussion Paper No. 1057, Available at SSRN: https://ssrn.com/abstract=2973315 or http://dx.doi.org/10.2139/ssrn.2973315

Cihan Artunç

Middlebury College ( email )

Middlebury, VT 05753
United States

HOME PAGE: http://sites.google.com/site/cihanartunc/

Timothy W. Guinnane (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
(203) 432-3616 (Phone)
(203) 432-3898 (Fax)

HOME PAGE: http://sites.google.com/site/timothywguinnanec/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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