Partnerships are the prevalent organizational form in many industries. Most partnerships share profits equally among the partners. Following Kandel and Lazear (1992) it is often argued that “peer pressure” mitigates the arising free-rider problem. This line of reasoning takes the equal sharing rule as exogenously given. The purpose of our paper is to show that with inequity averse partners – a ...

We analyze the optimal combination of promotion tournaments and individual performance pay in an employment relationship. An agent’s effort is non-observable and he has private information about his suitability for promotion. Thus, promotion tournaments and individual performance pay need to be combined to serve both incentive and selection purposes. We find that, if it is sufficiently importan...

We study the moral hazard problem without the first-order approach or other common structure. We present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression. We then show how this expression can be used to perform comparative statics exercises in which we study (i) the ef...

[preliminary] We compare two problems. One is the monotone Bayesian persuasion problem in which messages are monotone functions of state realizations. Another is the delegation problem with an extra assumption that extreme actions are always permitted. (E.g., an employee may need the employer’s permission to reduce the job involvement to part time, but no permission is needed to remain at full ...

I provide a micro-foundation for dynamically incomplete contracts that are renegotiated over time. The micro-foundation is based on showing that such contracts implement the optimal complete contract in a general dynamic model provided the players have “preference-for-robustness.” Preference-for-robustness is a way of modeling players perpetually having a fuzzy idea as time passes about events ...

The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the corresponding default risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structur...

This paper studies the e¤ect of social ties on governance. Social ties are per se neutral and merely act as incentive bridges that transmit incentives across individuals. Whether this improves or undermines governance depends on what incentives are transmitted. We demonstrate this in a delegated monitoring model where the supervisor is friends with the agent and cares about social recognition. ...

We develop a simple theoretical model of a long term buyer-supplier relationship with non-contractible buyer specific R&D investment, and derive predictions on the effects of trust and competition on suppliers’ investment and buyers’ procurement strategies. We address these issues empirically using unique survey data on individual buyer-supplier relationships in the German automotive industry. ...

We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt and credit line terms are independent...

We prove the existence of comonotone Pareto optimal allocations when decision makers have probabilistic sophisticated variational preferences and thus representing criteria in the class of law invariant robust utilities. In contrast to previous studies, we show that optimal allocations exist also when decision makers have very different preferences, for example characterized by different domain...