Partnership with Persistence

João Ramos and Tomasz Sadzik
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Tomasz Sadzik: UCLA

No 1264, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we analyze a continuous-time model of partnership with persistence. In the model, agents exert private efforts affecting persistent internal capital, which drives the profitability of the partnership. We characterize the optimal equilibrium with a novel Hamilton-Jacobi-Bellmann equation. It describes the maximal incentives for the partners, as a function of continuation values net of the internal capital. We show that imperfect monitoring of the internal capital discontinuously helps the agents. Even a partnership with high level of internal capital may unravel as a consequence of a short spell of bad outcomes. Good profit outcomes increase effort when partnership is doing badly, but decrease effort when partnership is doing well.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-gro and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1264

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