An Empirical Analysis of Share Contracting in Heterogeneous Groups

Abstract

"Sharing contracts divide a joint return among a group of contracting parties, and in this paper I study sharing rules devised under circumstances of group heterogeneity. Two categories of sharing contract are investigated. The first and perhaps more common category features sharing agreements formed prior to investments, and legal or reputational constraints on opportunistic renegotiations after investments are sunk. Contracts specifying equal sharing are predicted to occur with greater frequency in single speciality groups than multispeciality groups, and in smaller rather than larger groups. The analysis finds support for the prediction that equal sharing will be used with lower frequency in multispeciality groups, and for the prediction that equal sharing groups will be smaller than groups using productivity-weighted sharing rules. The second contract form studied here is from the incomplete contracting literature, and features allocation rules negotiated after individuals have sunk their investment in enhancing the joint return. Absent any repeat-relational contracting motives, the perfect equilibrium bargaining prediction implies allocation rules that are independent of investments. Analysis of sharing rules formed in a laboratory setting finds instead that ex post surplus shares are directly related to ex ante investment shares."