Efficiency and Stability in Partnerships

Citation

Legros, Patrick (1989) Efficiency and Stability in Partnerships. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/twmw-b767. https://resolver.caltech.edu/CaltechETD:etd-05222007-095847

Abstract

A partnership is an organization in which the owners of the firm provide inputs into the production process and in which they have, collectively, the power to make decisions. An institution defines how the output of the partnership is shared among the partners and also the collective decision process that will be used. An institution should have two desirable properties: efficiency and stability. Efficiency means that the partners have an incentive to provide efficient levels of inputs (the moral hazard problem) and that the decision process selects an efficient decision. Stability means that the partners do not want to modify the institution (renegotiation proofness).

When the inputs that the partners provide are not verifiable, there is a well established belief in the literature that efficiency cannot be sustained in partnerships. The first part of the dissertation establishes, contrary to this common belief, that the moral hazard problem can be almost eliminated in partnerships: there exists an allocation of the final output which induces each partner to almost always take an efficient action. It is in fact sometimes possible for the partners to attain full efficiency: necessary and sufficient conditions are established.

The second part of the thesis considers a situation in which renegotiation takes place through a mediator. It is shown that, under some sufficient conditions on the environment, there exist collective decision making processes which are (interim) efficient and which are renegotiation proof, i.e., stable.

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