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Efficiency in complementary partnerships with competition

  • Jan Y. Sand

    (Department of Economics and Management, University of Troms�, Troms�, Norway)

The objective of this paper is to show how efficiency can be implemented in a market with strictly complementary inputs when the productive firms undertake unobservable effort. The observable output is a joint undertaking by a partnership consisting of two types of firms. It is shown that simple linear sharing rules cannot implement socially optimal effort, but a modified linear sharing rule can implement the first-best outcome provided that commitment to the proposed sharing rule is possible. This is so even when the sharing rule is proposed by one of the active partners. When opening up for the possibility of renegotiating sharing contracts that have undesirable properties for one or more of the firms, it becomes more difficult to implement socially efficient solutions. Implementation of the socially efficient outcome requires that the sharing rule is proposed by an outsider to the partnership. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 30 (2009)
Issue (Month): 1 ()
Pages: 57-70

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Handle: RePEc:wly:mgtdec:v:30:y:2009:i:1:p:57-70
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  1. Patrick Legros & Steven Matthews, 1993. "Efficient and nearly efficient partnerships," ULB Institutional Repository 2013/7040, ULB -- Universite Libre de Bruxelles.
  2. Björn Bartling & Ferdinand A. von Siemens, 2010. "Equal Sharing Rules in Partnerships," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 299-320, June.
  3. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
  4. Hvide, Hans K, 2001. "Some Comments on Free-Riding in Leontief Partnerships," Economic Inquiry, Western Economic Association International, vol. 39(3), pages 467-73, July.
  5. Joseph Farrell and Suzanne Scotchmer., 1986. "Partnerships," Economics Working Papers 8616, University of California at Berkeley.
  6. Jerry R. GREEN & Jean-Jacques LAFFONT, 1992. "Renegotiation and the Form of Efficient Contracts," Annals of Economics and Statistics, GENES, issue 25-26, pages 123-150.
  7. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  8. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  9. Aghion, P. & Dewatripont, M. & Rey, P., 1990. "On renegotiation design," European Economic Review, Elsevier, vol. 34(2-3), pages 322-329, May.
  10. Jean Tirole, 1985. "Procurement and Renegotiation," Working papers 362, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Kline, J. Jude, 1997. "Efficiency and equilibria in complementary teams: A comment," Journal of Economic Behavior & Organization, Elsevier, vol. 32(4), pages 621-623, April.
  12. Vislie, Jon, 1994. "Efficiency and equilibria in complementary teams," Journal of Economic Behavior & Organization, Elsevier, vol. 23(1), pages 83-91, January.
  13. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August.
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