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Efficient and nearly efficient partnerships

  • Patrick Legros
  • Steven 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 non-trivial 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 ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/7040.

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Date of creation: 1993
Date of revision:
Publication status: Published in: The Review of Economic Studies (1993) v.60 n° 3,p.599-611
Handle: RePEc:ulb:ulbeco:2013/7040
Contact details of provider: Postal: CP135, 50, avenue F.D. Roosevelt, 1050 Bruxelles
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  1. repec:bla:restud:v:53:y:1986:i:1:p:43-57 is not listed on IDEAS
  2. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  3. Eric Rasmusen, 1987. "Moral Hazard in Risk-Averse Teams," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 428-435, Autumn.
  4. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  5. Patrick Legros & Hitoshi Matsushima, 1991. "Efficiency in partnerships," ULB Institutional Repository 2013/7044, ULB -- Universite Libre de Bruxelles.
  6. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  7. 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.
  8. repec:bla:restud:v:53:y:1986:i:1:p:59-69 is not listed on IDEAS
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