Strategic exits in stochastic partnerships: The curse of profitability

We study dynamic partnerships where the output evolves stochastically, each player can exit at any time, and players who have exited continue to accrue some benefits if the remaining players keep contributing to the partnership. Players can strategically exit to free‐ride on their partners' contributions, knowing that it may trigger subsequent exits of their partners. We characterize the unique Pareto‐optimal equilibrium. When players have sufficiently large free‐riding incentives and a medium level of mutual reliance, this equilibrium exhibits a curse of profitability: An increase in the partnership's output may strictly harm all the players. Another main finding is that Pareto improvement can be achieved if any player commits not to exit first.