Partnership Firms, Reputation and
Alan Morrison, William J. Wilhelm, Jr.
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.
WORDS: Partnership, on-the-job training, human capital, collective
JEL CLASSIFICATION: J24, J41, L14, L22.
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