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Efficient and Nearly Efficient Partnerships

  • Patrick Legros
  • Steven A. Matthews

This paper shows in two ways that the degree to which free-riding diminishes the performance of deterministic partnerships may be less than has been generally thought. First, a necessary and sufficient condition is provided for a partnership to sustain full efficiency. It implies that many nontrivial partnerships sustain efficiency, such as generic ones with finite action spaces, and neoclassical ones with Leontief technologies. Second, approximate efficiency is shown to be achievable in a large class of partnerships, including ones with smooth and monotonic production and disutility functions. Approximate efficiency is achieved by mixed strategy equilibria: one partner takes, with small probability, an inefficient action. The degree to which efficiency is approximated is restricted only by the amount of liability the partners can bear. Nonetheless, their equilibrium payments are not arbitrarily large.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 991R.

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Date of creation: Jul 1992
Date of revision:
Handle: RePEc:nwu:cmsems:991r
Contact details of provider: Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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  1. repec:bla:restud:v:53:y:1986:i:1:p:59-69 is not listed on IDEAS
  2. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  4. Steven R. Williams & Roy Radner, 1988. "Efficiency in Partnership When The Joint Output is Uncertain," Discussion Papers 760, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
  6. repec:bla:restud:v:53:y:1986:i:1:p:43-57 is not listed on IDEAS
  7. Patrick Legros & Hitoshi Matsushima, 1991. "Efficiency in partnerships," ULB Institutional Repository 2013/7044, ULB -- Universite Libre de Bruxelles.
  8. Eric Rasmusen, 1987. "Moral Hazard in Risk-Averse Teams," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 428-435, Autumn.
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