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Investment and Incentives in Partnerships

Listed author(s):
  • Espino, Emilio

    (Univ. Torcuato Di Tella)

  • Kozlowski, Julian

    (New York University)

  • Sánchez, Juan M.

    ()

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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-001.

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Length: 45 pages
Date of creation: 2013
Date of revision: 17 Jul 2015
Handle: RePEc:fip:fedlwp:2013-001
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  1. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
  2. Bolton, P. & von Thadden, E.L., 1996. "Blocks, liquidity and corporate control," Discussion Paper 1996-80, Tilburg University, Center for Economic Research.
  3. Abraham Arpad & Nicola Pavoni, 2004. "Efficient Allocations, with Moral Hazard and Hidden Borrowing and Lending," Levine's Bibliography 122247000000000138, UCLA Department of Economics.
  4. Aubhik Khan & B. Ravikumar, 1999. "Growth and risk-sharing with private information," Working Papers 99-12, Federal Reserve Bank of Philadelphia.
  5. Espino, Emilio, 2005. "On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information," Journal of Economic Theory, Elsevier, vol. 121(2), pages 192-213, April.
  6. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  7. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
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