Equal Sharing Rules in Partnerships

Abstract:     
Partnerships are the prevalent organizational form in many industries. Profits are most frequently shared equally among the partners. The purpose of our paper is to provide a rationale for equal sharing rules. We show that with inequity averse partners the equal sharing rule is the unique sharing rule that maximizes the agents' incentives to exert effort. We further show that inequity aversion can enhance efficiency in partnerships of given size, but that it can also cause partnerships to be inefficiently small.

Number of Pages in PDF File: 23

Keywords: equal sharing rule, partnerships, incentives, peer pressure, inequity aversion

JEL Classification: D20, D86, J54

Accepted Paper Series