TY - JOUR
T1 - Partnership as Experimentation
AU - Artunç, Cihan
AU - Guinnane, Timothy W.
N1 - Funding Information:
This article is supported by the National Science Foundation under the grant NSF SES 1559273. We thank Naomi Lamoreaux, Jean-Laurent Rosenthal, Seven Ag˘ ir, Shameel Ahmad, Lint Barrage, Price Fishback, Amanda Gregg, Timur Kuran, Jakob Schneebacher, Gabriella Santangelo, Christopher Udry, and seminar participants at Harvard Business School, Yale University, and the World Economic History Congress 2015 for comments and suggestions. Laura D. Taylor provided excellent research assistance. The staff of Yale University Lillian Goldman Law Library, Bibliothèque nationale de France, and the British Library helped in locating sources. We also thank Roger Bilboul and David Lisbona for kindly sharing some of their private collection. An earlier draft of this article was circulated under the title “Enterprise Forms and Partnership Survival in Egypt between 1910 and 1949.”
Funding Information:
National Science Foundation (NSF SES 1559273).
Publisher Copyright:
© 2019 The Author(s).
PY - 2019/11/1
Y1 - 2019/11/1
N2 - Recent research disputes the view that the joint-stock corporation played a crucial role in historical economic development, but retains the idea that the costless firm dissolution implicit in non-corporate forms deterred investment. A multi-armed bandit model demonstrates the benefits of costless dissolution in an environment where potential business partners are not fully informed. Experimentation creates a spike in dissolution rates early in firms' lives, as less productive matches break down and agents look for better matches. Many of the better matches adopt the corporate form, whose higher dissolution cost functions as a commitment device. We test the model's predictions using firm-level data on 12,000 enterprises established in Egypt between 1910 and 1949. The partnership reflected a trade-off between committing to a partner and sorting into potentially better matches, fostering the formation of more productive enterprises (JEL D21, D22, L26, N15, O16).
AB - Recent research disputes the view that the joint-stock corporation played a crucial role in historical economic development, but retains the idea that the costless firm dissolution implicit in non-corporate forms deterred investment. A multi-armed bandit model demonstrates the benefits of costless dissolution in an environment where potential business partners are not fully informed. Experimentation creates a spike in dissolution rates early in firms' lives, as less productive matches break down and agents look for better matches. Many of the better matches adopt the corporate form, whose higher dissolution cost functions as a commitment device. We test the model's predictions using firm-level data on 12,000 enterprises established in Egypt between 1910 and 1949. The partnership reflected a trade-off between committing to a partner and sorting into potentially better matches, fostering the formation of more productive enterprises (JEL D21, D22, L26, N15, O16).
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U2 - 10.1093/jleo/ewz007
DO - 10.1093/jleo/ewz007
M3 - Article
AN - SCOPUS:85074909405
VL - 35
SP - 455
EP - 488
JO - Journal of Law, Economics, and Organization
JF - Journal of Law, Economics, and Organization
SN - 8756-6222
IS - 3
ER -