Efficiency in Partnership When the Joint Output is Uncertain

Abstract

This paper concerns a model of partnership in which each partner privately chooses his input into a joint production process. The partners' inputs determine a probability distribution over a set of alternative output levels. Earlier work suggests that because of moral hazard, there cannot exist a rule for fully sharing the joint output that sustains the efficient inputs as a Nash equilibrium. We show that the existence of such a rule depends critically upon attitudes towards risk: the first-order conditions for existence are solvable generically if the partners are risk neutral, but are unsolvable generically if the partners are risk averse. Robust examples in the case of risk neutrality are then constructed in which such rules exist.