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Contractual Structure and Endogenous Matching in Partnerships

Maitreesh Ghatak () and Alexander Karaivanov ()

No 8298, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin.

Keywords: contractual structure; endogenous matching; partnerships (search for similar items in EconPapers)
JEL-codes: D12 D21 D23 D82 Q15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
Date: 2011-03
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