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Partnerships as Insurance Devices: Theory and Evidence

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  • Kevin Lang
  • Peter-John Gordon

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.

Suggested Citation

  • Kevin Lang & Peter-John Gordon, 1995. "Partnerships as Insurance Devices: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 614-629, Winter.
  • Handle: RePEc:rje:randje:v:26:y:1995:i:winter:p:614-629
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    Cited by:

    1. van Lent, L.A.G.M., 1999. "Incomplete contracting theory in empirical accounting research," Other publications TiSEM 088f797d-9fa4-4081-98f4-1, Tilburg University, School of Economics and Management.
    2. James B. Rebitzer & Lowell J. Taylor, 2007. "When Knowledge Is an Asset: Explaining the Organizational Structure of Large Law Firms," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 201-229.
    3. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, vol. 44(1), pages 183-194, July.
    4. Encinosa III, William E. & Gaynor, Martin & Rebitzer, James B., 2007. "The sociology of groups and the economics of incentives: Theory and evidence on compensation systems," Journal of Economic Behavior & Organization, Elsevier, vol. 62(2), pages 187-214, February.
    5. Martin Gaynor & Deborah Haas-Wilson, 1999. "Change, Consolidation, and Competition in Health Care Markets," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 141-164, Winter.
    6. Mohamed Ariff, 2011. "Ethics-based Financial Transactions: An Assessment of Islamic Banking," Chapters,in: The Foundations of Islamic Banking, chapter 2 Edward Elgar Publishing.
    7. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc.
    8. Özgür Kıbrıs & Arzu Kıbrıs, 2016. "On surplus-sharing in partnerships," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 47(1), pages 89-111, June.
    9. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, vol. 44(1), pages 183-194, July.
    10. repec:eee:jeborg:v:144:y:2017:i:c:p:121-132 is not listed on IDEAS
    11. Ran Abramitzky, 2008. "The Limits of Equality: Insights from the Israeli Kibbutz," Discussion Papers 07-048, Stanford Institute for Economic Policy Research.
    12. Fabio Caldieraro & Anne T. Coughlan, 2009. "Optimal Sales Force Diversification and Group Incentive Payments," Marketing Science, INFORMS, vol. 28(6), pages 1009-1026, 11-12.
    13. Michael T. Rauh, 2014. "Incentives, wages, employment, and the division of labor in teams," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 533-552, September.
    14. van Lent, L.A.G.M., 1996. "The Economics of an Audit Frm : The Case of KPMG in the Netherlands," Research Memorandum 730, Tilburg University, School of Economics and Management.
    15. Krakel, Matthias & Steiner, Gunter, 2001. "Equal sharing in partnerships?," Economics Letters, Elsevier, vol. 73(1), pages 105-109, October.
    16. Dutta, Jayasri & Prasad, Kislaya, 2002. "Stable risk-sharing," Journal of Mathematical Economics, Elsevier, vol. 38(4), pages 411-439, December.
    17. Prescott, Edward Simpson & Townsend, Robert M., 2002. "Collective Organizations versus Relative Performance Contracts: Inequality, Risk Sharing, and Moral Hazard," Journal of Economic Theory, Elsevier, vol. 103(2), pages 282-310, April.
    18. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," Les Cahiers de Recherche 750, HEC Paris.
    19. Kurschilgen, Michael & Morell, Alexander & Weisel, Ori, 2017. "Internal conflict, market uniformity, and transparency in price competition between teams," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168057, Verein für Socialpolitik / German Economic Association.
    20. Espino, Emilio & Kozlowski, Julian & Sanchez, Juan M., 2016. "Stylized Facts on the Organization of Small Business Partnerships," Review, Federal Reserve Bank of St. Louis, vol. 98(4), pages 297-310.
    21. Michael Kurschilgen & Alexander Morell & Ori Weisel, 2016. "Internal conflict, market uniformity, and transparency in price competition between teams," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_18, Max Planck Institute for Research on Collective Goods.

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