Contractual Structure and Endogenous Matching in Partnerships

27 Pages Posted: 30 Sep 2011

See all articles by Maitreesh Ghatak

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2011

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.

JEL Classification: D21, D23, D82, D12, Q15

Suggested Citation

Ghatak, Maitreesh and Karaivanov, Alexander, Contractual Structure and Endogenous Matching in Partnerships (February 1, 2011). LSE STICERD Research Paper No. EOPP024. Available at SSRN: https://ssrn.com/abstract=1935770

Maitreesh Ghatak (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 20 7852 3568 (Phone)
44 20 7955 6951 (Fax)

HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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