Breaking-up should not be hard to do! Designing contracts to avoid wars of attrition

Abstract

The partnership dissolution literature has almost entirely focused on the properties of exit mechanisms in isolation taking other features of the break-up process as given. We consider a simple, two-stage model of the dissolution process where both the decision to dissolve and the roles the partners play in the exit mechanism are endogenously determined according to a “triggering rule.” We find certain pairings of triggering rules and exit mechanisms can lead to a war of attrition which inefficiently prolongs the dissolution process. However, since these theoretical predictions require sophisticated reasoning and backward induction, it is unclear whether the theory has any empirical validity. We therefore conduct a laboratory experiment to explore this question. Treatments are selected to test the main predictions of the model using combinations of exit mechanisms and triggering rules commonly seen in practice. The experimental results are largely supportive of the underlying theoretical predictions.