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Partnership markets with adverse selection

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  • Gregory Dow

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Abstract

Ownership positions in large corporations can be traded on anonymous markets, but professional partnerships and worker cooperatives prohibit members from transferring their positions to outsiders without the consent of other insiders. These contrasting policies can be explained by adverse selection, which implies that the joint payoff of the partners is at least as large when continuing rather than departing members choose the terms on which new partners can join. In a separating equilibrium, or a pooling equilibrium in which only low-quality workers apply for positions, market sorting reduces total surplus. The market can sometimes improve on random assignment of workers to firms when there is a pooling equilibrium in which both high- and low-quality types apply. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Gregory Dow, 2014. "Partnership markets with adverse selection," Review of Economic Design, Springer;Society for Economic Design, vol. 18(2), pages 105-126, June.
  • Handle: RePEc:spr:reecde:v:18:y:2014:i:2:p:105-126
    DOI: 10.1007/s10058-013-0145-y
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    References listed on IDEAS

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    1. Pencavel, John & Craig, Ben, 1994. "The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 718-744, August.
    2. Sherstyuk, Katerina, 1998. "Efficiency in partnership structures," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 331-346, August.
    3. Craig, Ben & Pencavel, John, 1992. "The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest," American Economic Review, American Economic Association, vol. 82(5), pages 1083-1105, December.
    4. Jaewoo Ryoo, 1996. "Lemons Models of Professional Labor Markets Reconsidered," Eastern Economic Journal, Eastern Economic Association, vol. 22(3), pages 355-363, Summer.
    5. Gregory Dow, 1996. "Replicating Walrasian equilibria using markets for membership in labor-managed firms," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 147-162, December.
    6. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-1346, December.
    7. Allen, Marcus T, 1995. "Capital Structure Determinants in Real Estate Limited Partnerships," The Financial Review, Eastern Finance Association, vol. 30(3), pages 399-426, August.
    8. Spurr, Stephen J, 1987. "How the Market Solves an Assignment Problem: The Matching of Lawyers with Legal Claims," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 502-532, October.
    9. Dow, Gregory K., 1986. "Control rights, competitive markets, and the labor management debate," Journal of Comparative Economics, Elsevier, vol. 10(1), pages 48-61, March.
    10. Carr, Jack & Mathewson, Frank, 1990. "The Economics of Law Firms: A Study in the Legal Organization of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 307-330, October.
    11. Brad M. Barber, 1996. "Forecasting the Discounts of Market Prices from Appraised Values for Real Estate Limited Partnerships," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 471-491.
    12. Denning, Karen C. & Shastri, Kuldeep, 1993. "Changes in Organizational Structure and Shareholder Wealth: The Case of Limited Partnerships," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 553-564, December.
    13. Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-348, June.
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    Cited by:

    1. Gregory Dow, 2001. "Allocating Control over Firms: Stock Markets versus Membership Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(2), pages 201-218, March.

    More about this item

    Keywords

    Partnerships; Corporations; Labor-managed firms; Adverse selection; D23; D82;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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