Partnership with Persistence

67 Pages Posted: 14 Jan 2019 Last revised: 20 Oct 2019

See all articles by Joao Ramos

Joao Ramos

Marshall School of Business - University of Southern California

Tomasz Sadzik

New York University (NYU)

Date Written: January 1, 2019

Abstract

We study a continuous-time model of partnership, with persistence and imperfect state monitoring. Partners exert private efforts to shape the stock of fundamentals, which drives the pro ts of the partnership, and the profits are the only signal they observe. The near-optimal strongly symmetric equilibria are non-Markovian and are characterized by a novel differential equation that describes the supremum of equilibrium incentives for any level of relational capital. Imperfect monitoring of the fundamentals helps sustain incentives, due to deferred incentives, and increases the partnership's value (Sand in the wheels). Good profit outcomes rally the partners to further increase effort when relational capital is low, but lead them to coast and decrease effort when relational capital is high. Even partnerships with high fundamentals may unravel after a short spell of terrible signals (Beatles' break-up).

Keywords: partnership, dynamic games, continuous time, relational capital

JEL Classification: D21, D25, D82, D86

Suggested Citation

Ramos, Joao and Sadzik, Tomasz, Partnership with Persistence (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3308865 or http://dx.doi.org/10.2139/ssrn.3308865

Joao Ramos (Contact Author)

Marshall School of Business - University of Southern California ( email )

701 Exposition Boulevard, STE 205
Los Angeles, CA 90089-1422
United States

HOME PAGE: http://www.joaoaramos.com/

Tomasz Sadzik

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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