Profit Sharing and the Role of Professional Partnerships

Quarterly Journal of Economics, Forthcoming

Posted: 11 Nov 2004

See all articles by Jonathan Levin

Jonathan Levin

Stanford Graduate School of Business; Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Steven Tadelis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Abstract

When it is hard to assess product quality, firms will sub-optimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the historical prevalence of profit sharing in professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting, and the relative scarcity of profit sharing in other industries. It also sheds light on features of partnerships such as up-or-out promotion systems, and on recent trends in professional service industries.

Keywords: Partnerships, Profit Sharing, Asymmetric Information

JEL Classification: D20, D82, J33, J44, J54, L22

Suggested Citation

Levin, Jonathan D. and Tadelis, Steven, Profit Sharing and the Role of Professional Partnerships. Quarterly Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=594081

Jonathan D. Levin

Stanford Graduate School of Business ( email )

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Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Steven Tadelis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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