Partnership fragility and credit costs
NBER Working Paper No. 16689
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