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Optimal Partnership Contracts: Foundation and Duality

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  • Harrison Cheng

    (University of Southern California, visiting Institute of Economic Research, Kyoto University)

Abstract

We use the duality in linear programming to solva the problem of optimal partnership contracts with moral hazards. We show the importance of allowing the partners to have partial distribution of revenue under some contingencies. An optimal contract maximizes production efficiency minus the loss from undistributed revenue. It balances synergy effect and incentive cost. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed revenue, and in the second step, second best solution is found using the function derived in the first step. The primal solution gives us the contracts, while the dual solution identifies the priority in the improvement of production technology.

Suggested Citation

  • Harrison Cheng, 2004. "Optimal Partnership Contracts: Foundation and Duality," KIER Working Papers 591, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:591
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    Cited by:

    1. Harrison Cheng, 2005. "Optimal partnership contracts: Foundation and duality," International Journal of Economic Theory, The International Society for Economic Theory, vol. 1(2), pages 111-130, June.

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