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Partnerships as Insurance Devices: Theory and Evidence

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Author Info
Kevin Lang
Peter-John Gordon

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Abstract

We model partnerships as mutual insurance associations in which individuals band together to insure themselves against idiosyncratic shocks to their human capital. As with most forms of insurance, this generates a tradeoff between efficiency and risk sharing. Since partners keep only a fraction of the profits they generate, they will supply less-than-optimal effort. We show that in equilibrium, participants in larger partnerships keep a smaller share of their own proceeds. We test and confirm this prediction using a sample of partners in law firms.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 26 (1995)
Issue (Month): 4 (Winter)
Pages: 614-629
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Handle: RePEc:rje:randje:v:26:y:1995:i:winter:p:614-629

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  3. James B. Rebitzer & Lowell J. Taylor, 2006. "When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms," Economics Working Paper Archive wp_477, Levy Economics Institute, The. [Downloadable!]
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  4. Martin Gaynor & Deborah Haas-Wilson, 1998. "Change, Consolidation, and Competition in Health Care Markets," NBER Working Papers 6701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Mary A. Burke & Kislaya Prasad, 2005. "Contracts with social multipliers," Working Papers 05-17, Federal Reserve Bank of Boston. [Downloadable!]
  6. Alan Morrison & William J. Wilhelm, Jr., 2003. "Partnership Firms, Reputation and Human Capital," OFRC Working Papers Series 2003fe02, Oxford Financial Research Centre. [Downloadable!]
  7. Lent, L. van, 1996. "The economics of an audit firm : The case of KPMG in the Netherlands," Research Memorandum 730, Tilburg University, Faculty of Economics and Business Administration. [Downloadable!]
  8. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Mari Paz Espinosa & Inés Macho-Stadler, 2003. "Endogenous Formation of Competing Partnership with Moral Hazard," DFAEII Working Papers 200234, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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