The design and performance of sharing rules for a partnership in continuous time

Abstract

We study repeated partnerships with imperfect monitoring and risk neutrality. The interval between the partners' decisions, the delay, is given but can be arbitrarily small. Each stage-game's output is Gaussian, with mean and variance depending on the partners' actions, making the sequence of outcomes a discretization of a diffusion. A sharing rule is efficient if there is an equilibrium of the corresponding game whose outcomes are Pareto efficient; it is stable if these equilibria approach a limit as the delay approaches zero. We characterize partnerships for which there exist stable, efficient sharing rules, and describe the corresponding equilibria. Journal of Economic Literature Classification Numbers: C73, D2, D82. © 1996 Academic Press, Inc.