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Profit Sharing and the Role of Professional Partnerships

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  • Jonathan Levin
  • Steven Tadelis

Abstract

When it is hard to assess service quality, firms will suboptimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the relative scarcity of partnerships outside of professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting. It also sheds light on features of partnerships such as up-or-out promotion systems, the use of noncompete clauses, and recent trends in professional service industries.

Suggested Citation

  • Jonathan Levin & Steven Tadelis, 2005. "Profit Sharing and the Role of Professional Partnerships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 131-171.
    • Handle: RePEc:oup:qjecon:v:120:y:2005:i:1:p:131-171.
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    File URL: http://hdl.handle.net/10.1162/0033553053327506
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    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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