NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Partnership fragility and credit costs

Howard Bodenhorn

NBER Working Paper No. 16689
Issued in January 2011
NBER Program(s):   DAE

Economic teams, including the business partnership, are created to exploit gains from cooperation, but teams also fall prey to shirking and other opportunistic behaviors, which lead to their dissolution. If team production is partly financed with debt, the untimely dissolution of partnerships exposes creditors to default risks that they will price into debt contracts. This paper explores these two features of the nineteenth-century business partnership and finds: (1) partnerships were short-lived teams (two years or less, on average) and larger partnerships were shorter-lived yet; and (2) compared to proprietorship, partnerships paid higher interest rates on short-term debt, after controlling for loan size, maturity, and other observable features. Although there were potential gains from team production, potential opportunism raised the costs of partnerships.

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This paper was revised on January 24, 2013

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Document Object Identifier (DOI): 10.3386/w16689

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