Optimal Structure and Dissolution of Partnerships

Abstract

We study a partnership model with non-identical type distributions and interdependent values. For any convex combination of revenue and social surplus in the objective function, we derive the optimal dissolution mechanism for arbitrary initial ownership. This mechanism involves ironing around worst-off types, which are endogenously determined and typically interior. Given the optimal mechanism, we then determine the optimal initial ownership structures. Equal ownership is always optimal with identical distributions. With non-identical distributions, optimal ownership is typically asymmetric and the identity of the agents with large shares may change with the weight on revenue in the objective. Even fully concentrated ownership is optimal under natural conditions.