Risk, Incentives and Contracts: Partnerships in Rio de Janeiro, 1870-1891

Abstract

We use newly-constructed individual-level data on partnership contracts in late nineteenth century Rio de Janeiro to study the determinants of contract terms. We document that partners with and without limited liability both contributed capital and received profit shares, and that both types of partners received salaries despite limited partners not taking an active role in management. Partners with limited liability contributed more capital and received lower salaries and profit shares than their unlimited partners. Unlimited partners in turn received higher-powered incentives when they contracted with limited partners than when they contracted with unlimited partners. A reform that changed the relative bargaining power further improved the terms of unlimited partners in limited firms. These findings highlight the roles of risk, incentives, and bargaining power in shaping contracts.

Keywords: Partnerships, Brazil, Risk, Incentives

JEL Classification: J4, N26, N86