← Search

American Economic Review Vol. 94 No. 5 2004

Partnership Firms, Reputation, and Human Capital

Alan D. Morrison1; William J. Wilhelm2

1 Saïd Business School, University of Oxford, Park End Street, Oxford OX1 3SE, UK. · 2 McIntire School of Commerce, University of Virginia, Monroe Hall, Charlottesville, VA 22903 and Saïd Business School, University of Oxford, St. Edmund Hall, Park End Street, Oxford OX1 1HP, UK.

Abstract

In human capital intensive industries where it is difficult to contract upon the training effort of skilled agents a socially suboptimal level of training may occur. We show how partnership organisations can overcome this problem by tying human and financial capital. Partnerships are opaque so that the willingness of clients to pay depends upon reputation. Partnerships are illiquid and partners must stay with the firm until clients discover their type and update the firm's reputation. This renders unskilled agents, who will aversely affect reputation, unwilling to accept partnerships. Skilled agents therefore train the next generation so as to ensure that there is an adequate market for their own shares. We comment upon the salient differences between partnerships and joint stock firms.

DOI
10.1257/0002828043052367
Volume
94
Issue
5
Pages
1682-1692
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite