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Contractual structure and endogenous matching in partnershipso

Ghatak, Maitreesh and Karaivanov, Alexander (2011) Contractual structure and endogenous matching in partnershipso. Economic Organisation and Public Policy Discussion Papers (EOPP 024). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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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 (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2011 The Authors
Divisions: STICERD
Subjects: H Social Sciences > HM Sociology
Sets: Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 21 Jul 2014 14:22
Last Modified: 27 Dec 2019 00:25
URI: http://eprints.lse.ac.uk/id/eprint/58057

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