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Efficiency in complementary partnerships with competition

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  • Jan Y. Sand

    (Department of Economics and Management, University of Tromsø, Tromsø, Norway)

Abstract

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.

Suggested Citation

  • Jan Y. Sand, 2009. "Efficiency in complementary partnerships with competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 57-70.
  • Handle: RePEc:wly:mgtdec:v:30:y:2009:i:1:p:57-70
    DOI: 10.1002/mde.1438
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    File URL: http://hdl.handle.net/10.1002/mde.1438
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    References listed on IDEAS

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    9. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    10. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
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    13. repec:adr:anecst:y:1992:i:25-26:p:06 is not listed on IDEAS
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