Partnership and Hold-Up in Early America

37 Pages Posted: 28 Feb 2002 Last revised: 3 Aug 2022

See all articles by Howard Bodenhorn

Howard Bodenhorn

National Bureau of Economic Research (NBER); John E. Walker Department of Economics, Clemson University

Date Written: February 2002

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.

Suggested Citation

Bodenhorn, Howard, Partnership and Hold-Up in Early America (February 2002). NBER Working Paper No. w8814, Available at SSRN: https://ssrn.com/abstract=302575

Howard Bodenhorn (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John E. Walker Department of Economics, Clemson University ( email )

Clemson, SC 29631
United States

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