Profit sharing and monitoring in partnerships

Steven Huddart, Pierre Jinghong Liang

Research output: Contribution to journalArticle

38 Scopus citations

Abstract

We consider partnerships among risk-averse professionals endowed with (i) a risky and personally-costly production technology and (ii) a personally-costly monitoring technology providing contractible noisy signals about partners' productive efforts. Partners shirk both production and monitoring tasks because efforts are unobservable. We characterize optimal partnership size, profit shares and incentive payments when every partner performs the same tasks, and show that medium-sized partnerships are dominated by either smaller or larger partnerships. Prohibiting some partners from monitoring increases the incentives for others to monitor. We illustrate how task assignments and incentives interact, leading to improvements in partner welfare.

Original languageEnglish (US)
Pages (from-to)153-187
Number of pages35
JournalJournal of Accounting and Economics
Volume40
Issue number1-3
DOIs
StatePublished - Dec 1 2005

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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