Too big to cheat: Efficiency and Investment in Partnerships

Emilio Espino (), Julian Kozlowski and Juan Sanchez

No 2013-001, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Private information may limit insurance possibilities when a few agents form a partnership to pool idiosyncratic risk. We show that these insurance possibilities can improve if the partnership's income depends on capital accumulation and production, because cheating distorts investment. As agents' weights in the partnership increase, they are more affected by the investment distortion, and their incentives to misreport under the full information allocation are reduced. In the long run, either one of the partners is driven to immiseration, or both partners' lifetime utilities are approximately equal. The second case is only possible with capital accumulation. The theory's testable implications are in line with empirical evidence on the organization of small-business partnerships.

Keywords: Disclosure of information; Risk; Capital (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013
New Economics Papers: this item is included in nep-cta, nep-dge and nep-mic
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Too Big to Cheat: Efficiency and Investment in Partnerships (2015)
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DOI: 10.20955/wp.2013.001

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