Partnerships as Insurance Devices: Theory and Evidence
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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Volume (Year): 26 (1995)
Issue (Month): 4 (Winter)
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