Working Paper: CEPR ID: DP8298
Authors: Maitreesh Ghatak; Alexander Karaivanov
Abstract: We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin.
Keywords: contractual structure; endogenous matching; partnerships
JEL Codes: D12; D21; D23; D82; Q15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moral hazard (G52) | matching outcomes (C52) |
| characteristics of agents (L85) | decision to form partnerships (L14) |
| observed data (Y10) | agency costs (G34) |