Contractual Structure and Endogenous Matching in Partnershipso
AbstractWe 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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Date of creation: Feb 2011
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Endogenous matching; partnerships; contractual structure;
Other versions of this item:
- Ghatak, Maitreesh & Karaivanov, Alexander, 2011. "Contractual Structure and Endogenous Matching in Partnerships," CEPR Discussion Papers 8298, C.E.P.R. Discussion Papers.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-BEC-2011-07-21 (Business Economics)
- NEP-CTA-2011-07-21 (Contract Theory & Applications)
- NEP-MIC-2011-07-21 (Microeconomics)
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