Partnerships as Insurance Devices: Theory and Evidence

Kevin Lang and Peter-John Gordon

RAND Journal of Economics, 1995, vol. 26, issue 4, 614-629

Abstract: We model partnerships as mutual insurance associations in which individuals band together to insure themselves against idiosyncratic shocks to their human capital. As with most forms of insurance, this generates a tradeoff between efficiency and risk sharing. Since partners keep only a fraction of the profits they generate, they will supply less-than-optimal effort. We show that in equilibrium, participants in larger partnerships keep a smaller share of their own proceeds. We test and confirm this prediction using a sample of partners in law firms.

Date: 1995
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