Partnership markets with adverse selection

Gregory Dow

Review of Economic Design, 2014, vol. 18, issue 2, 105-126

Abstract: Ownership positions in large corporations can be traded on anonymous markets, but professional partnerships and worker cooperatives prohibit members from transferring their positions to outsiders without the consent of other insiders. These contrasting policies can be explained by adverse selection, which implies that the joint payoff of the partners is at least as large when continuing rather than departing members choose the terms on which new partners can join. In a separating equilibrium, or a pooling equilibrium in which only low-quality workers apply for positions, market sorting reduces total surplus. The market can sometimes improve on random assignment of workers to firms when there is a pooling equilibrium in which both high- and low-quality types apply. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Partnerships; Corporations; Labor-managed firms; Adverse selection; D23; D82 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Partnership Markets with Adverse Selection (1998)
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DOI: 10.1007/s10058-013-0145-y

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