|This centre is a member of The LSE Research Laboratory [RLAB]: CASE | CVER | CEP | FMG | SERC | STICERD||Cookies?|
Paper No' EOPP 024: | Full paper
Save Reference as: BibTeX File | EndNote Import File
Keywords: Endogenous matching; partnerships, contractual structure
JEL Classification: D21, D23, D82, D12, Q15
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Economic Organisation and Public Policy Discussion Papers
Share this page: Google Bookmarks | Facebook | Twitter
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.
Copyright © STICERD & LSE 2005 - 2021 | LSE, Houghton Street, London WC2A 2AE | Tel: +44(0)20 7955 6699 | Email: firstname.lastname@example.org | Site updated 28 November 2021