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Partnership with Persistence

Author

Listed:
  • Joao Ramos

    (University of Southern California)

  • Tomasz Sadzik

    (UCLA)

Abstract

In this paper we analyze a continuous-time model of partnership with persistence. In the model, agents exert private efforts affecting persistent internal capital, which drives the profitability of the partnership. We characterize the optimal equilibrium with a novel Hamilton-Jacobi-Bellmann equation. It describes the maximal incentives for the partners, as a function of continuation values net of the internal capital. We show that imperfect monitoring of the internal capital discontinuously helps the agents. Even a partnership with high level of internal capital may unravel as a consequence of a short spell of bad outcomes. Good profit outcomes increase effort when partnership is doing badly, but decrease effort when partnership is doing well.

Suggested Citation

  • Joao Ramos & Tomasz Sadzik, 2018. "Partnership with Persistence," 2018 Meeting Papers 1264, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1264
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    References listed on IDEAS

    as
    1. Yuliy Sannikov & Andrzej Skrzypacz, 2007. "Impossibility of Collusion under Imperfect Monitoring with Flexible Production," American Economic Review, American Economic Association, vol. 97(5), pages 1794-1823, December.
    2. Aislinn Bohren, 2016. "Using Persistence to Generate Incentives in a Dynamic Moral Hazard Problem," PIER Working Paper Archive 16-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Oct 2016.
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