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Profit Sharing in Partnerships: Complementarity, Productivity, and Commitment

Author

Listed:
  • Byung-Cheol Kim

    (University of Alabama)

  • Jin Yeub Kim

    (Yonsei University)

  • Hyunjun Cho

    (Yonsei University)

Abstract

In a partnership game, a principal and an agent negotiate over their profitsharing rule, after which each individually chooses effort, generating profits. We study the roles of complementarity in efforts, asymmetric productivity, and timing of effort choices in profit-sharing partnerships. When the agent is relatively more productive than the principal, the agent gets lower bargaining power under a stronger degree of complementarity. The surplus of the partnership is always higher in the case of sequential effort choice than in the simultaneous-choice counterpart. We provide implications for allocation of ownership in corporate governance, surplus maximization in partnerships, and optimal hiring.

Suggested Citation

  • Byung-Cheol Kim & Jin Yeub Kim & Hyunjun Cho, 2024. "Profit Sharing in Partnerships: Complementarity, Productivity, and Commitment," Working papers 2024rwp-224, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2024rwp-224
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    More about this item

    Keywords

    game theory; Partnership; Ownership Structure; Profit-Sharing Rule; Negotiation; Complementarity.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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