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Accounting in partnerships

Steven Huddart and Pierre Jinghong Liang

This paper offers a perspective on partner compensation schemes and the accounting information systems that support them. Our analysis focuses on one particular omnipresent size synergy, namely improved risk sharing. We consider sharing rules that are linear in the observable contracting variables under three information regimes. In the first-best case, perfect information about each partner's effort is contractible. Next, we consider the case where only firm output is contractible. In the final case, we assume that an exogenously-specified accounting system provides noisy signals of individual partner's efforts. In each case, the tension between the risk-sharing synergy and moral hazard determines firm size.

JEL Classification: C72 L25 M52

Keywords: incentive contracting, monitoring, risk aversion, syndicates

American Economic Review Volume 93, No. 2 (May 2003) 410-414

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
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huddart@psu.edu
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