Partnership as Experimentation

Abstract

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).

The Impact of Business Cycle Conditions on Firm Dynamics and Composition

“…Corporate mergers were rare, and most of those occurred after the financial crisis of 1907, before this paper’s period of study. But many partnerships churned through partners (Artunç and Guinnane 2019). About 10 percent of all companies in the dataset were established because of these reorganizations.…”

“…Artunç (2019) andArtunç and Guinnane (2019) also take advantage of this dataset to address questions relating to ownership structures and choice of enterprise form.…”

The Births, Lives, and Deaths of Corporations in Late Imperial Russia

“…Historical works that model firm exit using a hazard function approach to survival includeKlepper (2002),Postel- Vinay (2016 -on banks), andThompson (2005). For an early application using modern firm micro-data, seeAudretsch and Mahmood (1995).28 The role of dissolution costs in lowering the "exit" rate of corporations relative to other organizational forms is an important point raised (and shown) in the early 20 th century Egyptian context byArtunc and Guinnane (2019).29 For studies of firm entry and exit in other developed economies, see the papers cited under Table1and elsewhere in this section. This literature is surveyed inCaves (1998).…”