Partnership with Persistence
67 Pages Posted: 14 Jan 2019 Last revised: 20 Oct 2019
Date Written: January 1, 2019
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: Suggested Citation