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Too big to cheat: Efficiency and Investment in Partnerships

Author

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  • Espino, Emilio

    (Univ. Torcuato Di Tella)

  • Kozlowski, Julian

    (New York University)

  • Sánchez, Juan M.

    ()

Abstract

Private information may limit insurance possibilities when a few agents form a partnership to pool idiosyncratic risk. We show that these insurance possibilities can improve if the partnership's income depends on capital accumulation and production, because cheating distorts investment. As agents' weights in the partnership increase, they are more affected by the investment distortion, and their incentives to misreport under the full information allocation are reduced. In the long run, either one of the partners is driven to immiseration, or both partners' lifetime utilities are approximately equal. The second case is only possible with capital accumulation. The theory's testable implications are in line with empirical evidence on the organization of small-business partnerships.

Suggested Citation

  • Espino, Emilio & Kozlowski, Julian & Sánchez, Juan M., 2013. "Too big to cheat: Efficiency and Investment in Partnerships," Working Papers 2013-001, Federal Reserve Bank of St. Louis, revised 30 Sep 2017.
  • Handle: RePEc:fip:fedlwp:2013-001
    DOI: 10.20955/wp.2013.001
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    References listed on IDEAS

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    Cited by:

    1. Golosov, M. & Tsyvinski, A. & Werquin, N., 2016. "Recursive Contracts and Endogenously Incomplete Markets," Handbook of Macroeconomics, Elsevier.
    2. Chen, Yunmin & Chien, YiLi & Yang, C.C., 2015. "Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies," Working Papers 2015-43, Federal Reserve Bank of St. Louis, revised 01 Apr 2016.

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    Keywords

    Disclosure of information; Risk; Capital;

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