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Contractual Structure and Endogenous Matching in Partnershipso

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  • Maitreesh Ghatak
  • Alexander Karaivanov

Abstract

We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economic Organisation and Public Policy Discussion Papers Series with number 024.

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Date of creation: Feb 2011
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Handle: RePEc:cep:stieop:024

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: Endogenous matching; partnerships; contractual structure;

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  1. Patrick Legros & Andrew F. Newman, 2002. "Monotone Matching in Perfect and Imperfect Worlds," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 925-942.
  2. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
  3. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
  4. Jonathan Levin & Steven Tadelis, 2005. "Profit Sharing and the Role of Professional Partnerships," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 131-171, January.
  5. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Centre de Recherche en Economie et Statistique.
  6. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, vol. 43(3), pages 455-68, May.
  7. CITANNA, Alessandro & CHAKRABORTY, Archishman, 2001. "Occupational Choice, incentives and wealth distribution," Les Cahiers de Recherche 720, HEC Paris.
  8. DAM, Kaniska & PEREZ-CASTRILLO, David, . "The principal-agent matching market," CORE Discussion Papers RP -1903, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
  10. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
  11. MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-55, December.
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  1. repec:cge:warwcg:119 is not listed on IDEAS
  2. Ghatak, Maitreesh & Karaivanov, Alexander, 2013. "Contractual Structure in Agriculture with Endogenous Matching," CAGE Online Working Paper Series 120, Competitive Advantage in the Global Economy (CAGE).

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