Three essays on Efficiency and Incentives in Teams and Partnerships

Classic economic theory claims that teams and partnerships are inflicted with free– riding incentives and are inferior to capitalist firms in eliciting proper actions from players. This contradicts the popularity of teams and partnerships as organization forms. By accounting for several factors that may significantly affect effort provision (investment) but have been generally neglected in the literature: 1) tournament effect within teams; 2) other–regarding preferences; 3) possible dissolution of a partnership, this dissertation shows that teams and partnerships are not handicapped organization forms. Whether efficient efforts provision (investment) is achieved or not depends critically on the mechanisms employed in the allocation of team output and dissolution of a partnership. If some noisy ranking of efforts is observable and contractible, efficient provision of efforts can always be achieved in symmetric equilibrium by using rank–order tournaments to allocate the team output. If the players are subjected to limited liability, achievement of efficiency requires sufficient accuracy of the ranking technology. If the players show other–regarding preferences, efficient provision of efforts can be achieved through a randomly punishing contract. If the partnership faces possible dissolution, efficient investment and dissolution can be achieved through an option contract. However, the most widely used and recommended dissolution rule “buy–sell provision” fails to achieve efficiency as it leads to either excessive investment combined with efficient dissolution or underinvestment combined with excessive dissolution.