legros-1993review of economic studies

The Review of Economic Studies Ltd.

Efficient and Nearly-Efficient Partnerships
Author(s): Patrick Legros and Steven A. Matthews
Source: The Review of Economic Studies, Vol. 60, No. 3 (Jul., 1993), pp. 599-611
Published by: The Review of Economic Studies Ltd.
Stable URL:http://www.jstor.org/stable/2298126

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R e v ie w

o f E c o n o m ic S tu d ie s (1 9 9 3 ) 6 8 , 5 9 9 -6 1 1

0 0 3 4 -6 5 2 7 /9 3 /0 0 3 0 0 5 9 9 $ 0 2 .0 0

?

1 9 9 3 T h e R e v ie w

o fE c o n o m ic S tu d ie s L im ite d

E f f ic ie n t

a nd

N e a r ly - E f f i c i e n t

P a rt n e rs h i p s

PA T R IC K

L E G R O S

C o rn e llU n i v e rs i t y

a nd

STEVEN A. M A T IT H E W S

No rt h w e s t e rnU n i v e rs i t y

F i rs t v e rs i o n re c e i v e d No v e m b e r 1 9 8 9 ; f i n a l v e rs i o n a c c e p t e d F e b ru a ry 1 9 9 3 ( E d s . )

T h is pa persh ow s in tw o w a ys th a tthe d e g re e to w hichf re e - ri d i n g d im in is h e s th e p e rf o rm a n c e o fd e t e rm i n i s t i c pa rtn ersh ips m a y b e le s stha n ha s beeng e n e ra lly t h o u g h t . F i rs t ,a n e c e s s a ry a nd su fficien t c o n d itio n isp ro v i d e dfor a p a rt n e rs h i pt o su sta inf u lle f f i c i e n c y.I t i m p li e stha t m a n y n o n - t ri v i a lp a rt n e rs h i p s s u s t a i n

e f f i c i e n c y,s u c ha s g e n e ri c ones w ith finite a ction

spa ces, a nd

n e o c la s s i c a l o n e s

w ith

L e o n t i e f t e c h n o lo g i e s .

S e c o n d ,

a p p ro x i m a t e e f f i c i e n c y is shown

t o

b e

a c h i e v a b le in a la rg e c la s s o f p a rt n e rs h i p s , i n c lu d i n g o n e s w i t h s m o o t ha nd m o n o t o n i c p ro d u c t i o n

a nd

d i s u t i li t y f u n c t i o n s . A p p ro x i m a t e

e ffic ie n c yi sa c h ie v e d

b y m i x e d - s t ra t e g y e q u i li b ri a :o n e

p a rt n e r t a k e s , w i t h

sm a ll prob a b ility,a n

in e ffic ie n t a ction. T h ed e g re e to

w h ic h

e ffic ie n c yi s

a p p ro x i m a t e di s re s t ri c t e d o n ly b yth e a m o u n to f li a b i li t yth e p a rt n e rsca nb e a r. N o n e t h e le s s ,

t h e i r e q u i li b ri u m p a ym e n t s a re n o ta rb itra rily la rg e .

1 . INT R O D U C T IO N

W es t u d yd e t e rm i n i s t i c p a rt n e rs h i p s , e n t e rp ri s e si n w hich

ri s k - n e u t ra lp a rt n e rs j o i n t ly p ro d u c e a c c o rd i n g t o a n o n - s t o c h a s t i c t e c h n o lo g y,a nd s h a re t h e re s u lt i n g o u t p u t a m o n g t h e m s e lv e s . I t i sg e n e ra lly a c c e p t e dth a t su ch p a rt n e rs h i p s a re i n e f f i c i e n ti fth ep a rt n e rs ' a c t i o n sa re n o t v e ri f i a b le .T he a rg u m e n ti s t h a t som e p a rt n e r w i ll s h i rk b e c a u s eh e m u s t s h a ret h e m a rg i n a l b e n e f i to f h i se f f o rt ,b u t h e a lo n e b e a rs i t s c o s t .

H o lm s t r6 m

(1 9 8 2 )

f o rm a li z e sth isa rg u m e n t to s h o wtha ti n c e rt a i nd i f f e re n t i a b le , m o n o t o n i cp a rt n e rs h i p s ,

n o s h a ri n g ru le c a n e li c i ta n e f f i c i e n t s e t o f a c t i o n s .

O u rf i rs t re s u lt in d ic a te stha t th isa rg u m e n t p a i n t s to od a rk a

p i c t u re .W e g i v ea s i m p le n e c e s s a rya n d s u ffic ie n t c o n d itio nfo r th ee x i s t e n c e o fa s h a ri n gru le f o r w h i c ha n efficien t a ctio np ro f i lei s a

Na she q u i li b ri u m .A n i m p li c a t i o nis tha t e f f i c i e n c y isi nfa ct

s u s t a i n a b lei n

i n t e re s t i n g p a rt n e rs h i p s ,s u c h

a s g e n e ri co n e sw ith

a

fin ite n u m b e ro f p o s s i b le a c t i o n s ,o r t h o s ei n w hich the p a rt n e rs 'a ctions a re p e rf e c t c o m p le m e n t s ( L e o n t i e f p a rt n e rs h i p s ) . E f f i c i e n c y is a lso s u s t a i n a b lei fo n e p a rt n e r i s n o t a b le t o a f f e c t o u t p u t . T h is i sH o lm s t r6 m ' s re s u lt ( 1 9 8 2 ) t h a t e f f i c i e n c y i s a t t a i n a b le i f a

t h i rd p a rt y i s e m p lo ye d t o

" b re a kth eb u d g e t " - s u c h

at h i rdp a rt y i sm e re ly ap a rt n e r w h o c a n n o t a f f e c t o u t p u t , b u t

ca ns h a rei n i t sc o n su m ptio n .

N o n e t h e le s s ,o u r c h a ra c t e ri z a t i o n of efficient p a rt n e rs h i p s a llo w s a s i m p le p ro o f tha t e f f i c i e n c yi su n a t t a i n a b le i nn e o c la s s i c a l p a rt n e rs h i p s ,o n e si n w h ic h th e p ro d u c t i o na nd u t i li t yf u n c t i o n s a re s m o o t h ,a nd e f f i c i e n c y re q u i re sea ch p a rt n e rt ota kea

p ro d u c t i v e a ctio n( t h i s g e n e ra li z e s H o lm str6 m 'si n e f f i c i e n c y re s u lt ) . A g a i n , h o w e v e r,th esitu a tio n m a yn o t b e to o

g lo o m y.

O ur second

re s u lt i s t h a tq u i t e g e n e ra lly, e f f i c i e n c y can be

a p p ro x i m a t e dt o a n y d e s i re d d e g re e t h ro u g hth e u seo f s i m p lem ix e d s t ra t e g i e s , p ro v i d e d

5 9 9

6 0 0

R E V IE W

O F

E C O NO M IC

S T U D IE S

th a t th e to ta lli a b li t yo f th ep a rt n e rs h i pi s u n c o n s t ra i n e d .T his is them a in result ofth e

p a p e r.

T o p ro v e i t ,w e c o n s t ru c te q u ilib ria in w hich a llp a rt n e rsb u tone choose th e ir

e ffic ie n t

a ction s, a nd tha tp a rt n e rc h o o s e sh ise ffic ie n t a ctio nw ithh ig hp ro b a b i li t y.G iv e n

a ny

p ro b a b i li t yc lo s et o one, as h a ri n gru leis fo u n dw h ic hin d u c e ss u c ha n e q u i li b ri u m , w ith

t h e m i x i n g p a rt n e rc h o o s in g

h ise ffic ie n t a ctio nw i t h t h a t p ro b a b i li t y.E ffic ie n c yi sth u s

a p p ro x i m a t e d to a ny d e g re ed e s i re d .

T h isre s u ltre li e so n th ep a rt n e rs h a v in gu n li m i t e dli a b i li t y.T he s h a ri n gru le

im poses

la rg e fines on som ep a rt n e rs w henth eo u tpu t ta keso n c e rt a i nv a lu e s .T he

p a rt n e rs w ho

s u re lya c t e f f i c i e n t ly do nots h i rk beca usei f one of th emd o e ss h i rk , t h e s h a ri n g

ru lew ill

m a ke them

a ll pa y t h em ix in gp a rt n e ra

la rg efin e in thee v e n t tha t he too chooses

a n

in e ffic ie n ta ction. T he s m a lle r th ep ro b a b i li t yth a t th e m ix in gp a rt n e rc h o o s e s a n in efficien t

a ction, th ela rg e rm ust be th ef i n e re q u i re d to deterth eo t h e rsf ro ms h i rk i n g .

A nu p p e r

b o u n do nh o w

m ucha

p a rt n e r ca n be m a de to pa y w ill,i n g e n e ra l,li m i tt h e d e g re et o

w h ic he ffic ie n c y ca nb e a p p ro x i m a t e d .

W e c o n c lu d etha tf re e - ri d i n gca u sesin e ffic ie n c y o n ly to thee x t e n ttha t th e

li a b i li t y

o f th ep a rt n e rsi s li m i t e d ,o r th e ir w ea lth isb o u n d e d .

T h i spu ts t h e p a rt n e rs h i pp ro b le m i n a new li g h t .It su ggests, f o r e x a m p le , tha ts u c c e s s f u l p a rt n e rs h i p ss h o u ldbe com posed o f w e a lt h yin d iv id u a lsw h oc a n h o ld la rg eli a b i li t i e s .

I n th isp a p e r, n op a rt n e r' s e q u ilib riu m pa ym en t is a rb itra rilyla rg e .T h isd i f f e re n t i a t e s o u ra ppro x im a tee ffic ie n c y re s u ltf ro m t h ew e ll- k n o w no n e o f M i rrle e s ( 1 9 7 4 ,1 9 7 5 ). M o re c lo s e lyre la t e disG j e s d a l' s (1 9 7 6 )o b s e rv a t i o ntha t f u lle ffic ie n c y ca n bea c h ie v e d in a

p ri n c i p d l- a g e n t m odel if th ea gent's a ctio nsh iftsth es u p p o rto f a ra n d o mo u tpu t.'T he p a rt n e rs ino u r schem ew h os u re ly a ct e f f i c i e n t lya re a n a lo g o u st o G j e s d a l' sa gent: ea ch o fth em

v ie w so u tpu ta s ra n d o m ,a n d a s a b let o t a k e o na v a lu ea t w h ic ha

pu n ish in g

fin e m u stb e pa idif a n do n ly if he choosesa n in efficien t a ctio n .

O th er p a p e rsh a v e sh o w n th a te ffic ie n c yo rnea re ffic ie n c yca nb e obta inedi no t h e r

k i n d so f p a rt n e rs h i p s ,o n e s

w ith

a

ra n d o m

t e c h n o lo g y, 2

o rri s k - a v e rs ep a rt n e rsa nd

ra n d o m - s h a ri n gru le s , 3o r re p e a t e dp la y.4 To our k n o w le d g e ,th is is thef i rs t pa per

t o

c o n s id e r t h o ro u g h ly th e efficien cya nd n e a r- e f f i c i e n c yo f o n e -sh o t, n on -stoch a sticp a rt n e r-

sh ips w ithri s k - n e u t ra l p a rt n e rs .

T he b a la n c e o f t h epa per s t a rt s w ith d e fin itio n s in Section 2 a nde x a m p le si nS e c tio n 3 .E f f i c i e n t p a rt n e rs h i p sa re s t u d i e di nS e c tio n4 ,n e a rly- e f f i c i e n tp a rt n e rs h i p si nS e c tio n 5 ,a n d li m i t e d li a b i li t yi nS e c tio n 6. Issues a nd extensions a red i s c u s s e di nS e c tio n7 .

2 . NO T A T IO NA ND

M A INT A INE D

A S S U M P T I O NS

Ap a rt n e rs h i ph e re c o n s i s t so fa t lea st tw o p a rt n e rs ,N ={ 1 ,....,

n };a

set of a ctionsA i

for ea ch

p a rt n e r;a

d i s u t i li t yfu n c tio n

v i: A io- >9

fo r ea ch

p a rt n e r;a nd

a

p ro d u c t i o n

fu n c tio nf :A- >

,w h e reA =

X iE NA i.

A ctio np ro f i lea

re s u lt si no u tpu ty = f(a ).

T he

u t i li t yo fp a rt n e rii ss i -v i(a i) i f h e re c e i v e ss h a res i o fo u tpu t a nd ta kes a ction a i.

E a c hA i isac o m p le t em e t ri c spa ce, a ndf Q- )a nd ea ch v i(* )a re B o re l m e a s u ra b le . F o r t h e m ost p a rt th isg e n e ra li t yd o e sn o t c o m p li c a t eth e a n a lysis; w heni t d o e s ,w efo c u s o n fa m ilia rca ses,s u c ha sA i=9 1 + . E a chv i(-) is a ssum ed bounded