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Contractual structure and endogenous matching partnerships

Ghatak, Maitreesh and Karaivanov, Alexander (2011) Contractual structure and endogenous matching partnerships. Economic Organisation and Public Policy Discussion Papers, EOPP 024. STICERD, London, UK.

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Identification Number: EOPP 024

Abstract

We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk/_new/publications/abstrac...
Additional Information: © 2011 The Authors
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q1 - Agriculture > Q15 - Land Ownership and Tenure; Land Reform; Land Use; Irrigation
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 14 Apr 2011 10:55
Last Modified: 14 Apr 2011 10:55
URI: http://eprints.lse.ac.uk/id/eprint/35622

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