Efficiency in complementary partnerships with competition

Abstract

This paper investigates a market with strictly complementary inputs, with a particular emphasis on how efficiency can be implemented when the productive firms undertake unobservable effort. It is shown that simple linear sharing rules cannot implement socially optimal effort, but a modified linear sharing rule can implement the first-best outcome and a restricted linear sharing rule can be used to implement the second-best outcome. In addition, problems associated with commitment to the sharing rule is discussed.