Yigal
Gerchak
Professor
of
Industrial
Engineering
Tel
Aviv
University
Tel
Aviv,
Israel
ygerchak@eng.tau.ac.il
Abstract
In
creating
a
new
partnership
(“syndicate”),
what
division
of
uncertain
future
profit
should
the
parties
select?
We
consider
partnerships
with
no
substantial
initial
investment
and
no
moral
hazard.
Parties
may
differ
in
risk
attitudes
and
beliefs.
The
common
approach
is
bargaining.
We
take
a
different
approach:
One
party
proposes
to
the
other
a
contract,
similarly
to
the
principal-agent
approach.
The
initiating
party
wishes
to
maximize
its
expected
utility,
with
respect
to
its
own
beliefs,
subject
to
a
n
(“individual
rationality”
constraint
on
the
other
party’s
expected
utility,
w.r.t
its
risk
attitudes
and
beliefs.
Using
optimal
control,
we
show
that
the
optimal
contract
may
be
non-linear,
and
not
even
monotone
increasing
in
the
profit.
We
then
show
how
to
find
the
optimal
monotone
contract
(still
possibly
non-linear).
We
then
provide
conditions
for
the
optimality
of
linear
contracts,
common
in
practice,
and
conditions
for
one
partner
to
receive
a
constant
amount
and
the
other
the
rest
of
the
profit.
We
give
examples
of
famous
contracts
from
the
history
of
jazz.
Biographical
Sketch
Yigal
Gerchak
is
a
Full
Professor
at
the
department
of
Industrial
Engineering
at
Tel-Aviv
University.
His
current
research
interests
include
coordination
in
decentralized
supply
chains,
applications
of
game
theory,
operations
management
and
decision
analysis.
He
loves
Turkish
food
(especially
deserts!).
*Light refreshments will be served at 12pm