Profit Sharing and Monitoring in Partnerships

45 Pages Posted: 10 Mar 2004

See all articles by Steven J. Huddart

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University; CAFR/SAIF

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

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.

Keywords: Incentive contracting, monitoring, risk aversion, syndicates

JEL Classification: C72, L25, M52, M49

Suggested Citation

Huddart, Steven J. and Liang, Pierre Jinghong, Profit Sharing and Monitoring in Partnerships (March 2005). Available at SSRN: https://ssrn.com/abstract=515642 or http://dx.doi.org/10.2139/ssrn.515642

Steven J. Huddart (Contact Author)

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

HOME PAGE: http://directory.smeal.psu.edu/sjh11

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

CAFR/SAIF ( email )

1954 Huashan Road
Shanghai P.R.China, 200030
China

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