Abstract
This paper studies how entrepreneurs, limited in how much they are able to contribute to a joint business, organize in partnerships, and how this process is impacted by the frictions common for team production. It demonstrates that moral hazard and reliance on simple equity sharing contracts create incentives for the entrepreneurs making large contributions to team up together, even if the production technology exhibits decreasing returns to scale to total investment. The paper formalizes this novel mechanism in a matching model and illustrates that the model’s predictions regarding co-owners’ financial contributions and ownership shares are consistent with the empirical evidence from the Kauffman Firm Survey data.
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