Partnership with Persistence

Department of Economics & Decision Sciences

Speaker : Tomasz Sadzik

Assistant Professor at UCLA

Videoconference

Abstract :

We study a continuous-time model of partnership with persistence and imperfect state monitoring. Partners exert private efforts to shape the stock of fundamentals, which drives the profits of the partnership, and the profits are the only public signal. The near-optimal strongly symmetric equilibria are characterized by a novel differential equation that describes the supremum of equilibrium incentives for any level of relational capital. Under (almost) perfect monitoring of the fundamentals, the only equilibria are (approximately) stationary Markov. Imperfect monitoring helps sustain relational incentives and increases the partnership's value by extending the relevant time horizon for incentive provision. Good profit outcomes rally the partners when relational capital is low but lead them to coast when relational capital is high, and even partnerships with high fundamentals may unravel.