Profit Sharing and the Role of Professional Partnerships

Stanford Institute for Economic Policy Research Paper No. 03-031

37 Pages Posted: 2 Jul 2004

See all articles by Jonathan Levin

Jonathan Levin

Stanford Graduate School of Business; Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2004

Abstract

When it is hard to assess product quality, firms will sub-optimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the historical prevalence of profit sharing in professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting, and the relative scarcity of profit sharing in other industries. It also sheds light on features of partnerships such as up-or-out promotion systems, and on recent trends in professional service industries.

Keywords: Profit Sharing, Partnerships, Organizations, Firm Structure

JEL Classification: D20, D82, J33, J44, J54, L22

Suggested Citation

Levin, Jonathan D. and Tadelis, Steven, Profit Sharing and the Role of Professional Partnerships (August 2004). Stanford Institute for Economic Policy Research Paper No. 03-031. Available at SSRN: https://ssrn.com/abstract=500322 or http://dx.doi.org/10.2139/ssrn.500322

Jonathan D. Levin

Stanford Graduate School of Business ( email )

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Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Steven Tadelis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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