Partnership with Persistence
74 Pages Posted: 14 Jan 2019 Last revised: 1 Oct 2021
Date Written: January 1, 2019
We study a continuous-time model of partnership with persistence and imperfect state monitoring. Partners exert private e orts to shape the stock of fundamentals, which drives the pro ts of the partnership, and the pro ts are the only public signal. The near-optimal strongly symmetric equilibria are characterized by a novel differential equation that describes the supremum of equilibrium incentives for any level of relational capital. Under (almost) perfect monitoring of the fundamentals, the only equilibria are (approximately) stationary Markov. Imperfect monitoring helps sustain relational incentives and increases the partnership's value by extending the relevant time horizon for incentive provision. The results are consistent with the predominance of partnerships and relational incentives in environments where effort has long-term and qualitative impact and in which progress is hard to measure.
Keywords: partnership, dynamic games, continuous time, relational capital
JEL Classification: D21, D25, D82, D86
Suggested Citation: Suggested Citation