Making Partner*

AuthorAntoine Renucci, Frédéric Loss
Publication Date01 Oct 2020
Scand. J. of Economics 122(4), 1510–1534, 2020
DOI: 10.1111/sjoe.12390
Making Partner*
Fr´ed´eric Loss
Universit´e Paris-Dauphine, PSL Research University, LEDa-SDFi, FR-75775 Paris Cedex 16,
Antoine Renucci
Universit´e de Pau et des Pays de l’Adour/E2S UPPA, FR-64100 Bayonne,France
Associates need reputation and financial resources to make partner at law firms, consultancies,
and venture capital organizations. We provide a theory for how this prospect influences the
business risk strategy they pursue and their execution effort. In our model, business risk affects
how reputation evolves and the benchmark reputation for making partner through the impact
of execution effort on the financial resources accumulated. We show that when business risk is
observable,associates with good reputation take on high business risk, as opposed to lowbusiness
risk, in order to protect their reputation. We also show that opening partner positions decreases
the effort incentives of the associates with the best reputation. Finally, we conjecture that wage
dispersion at the associate level should be higher when business risk is unobservable.
Keywords: Business risk; career concerns; partnerships; reputation risk
JEL classification:D83; G30; L14; L26
I. Introduction
Partnerships have long been playing a major role in the economy. They
represent a prominent form of organization for most professional service
providers (e.g., law, architecture, accounting, advertising, and consulting
firms; medical practices; and venture capital and buy-out organizations)
and used to be dominant among investment banks until the 1980s.1The
partnership arrangement allows firms to assemble (Gaynor and Gertler,
*We are grateful to two anonymous referees for their very useful insights, and to Riccardo
Calcagno, Alexander Groh, Benjamin Hammer, Roman Inderst, and Laurent Vilanova, who
commented on one of the first versions of this paper that wascirculated. We also thank participants
of the World Congress of the Econometric Society in Shanghai, the Association Fran¸caise de
Sciences Economiques meeting in Nice, and the European Financial Management Association
meeting in Milan, as well as seminar participants at Imperial College London, Paris Dauphine
University,and Ecole de Management de Lyon - Universit`e Lyon 2. The usual disclaimers apply.
1Salomon Brothers, Lehman Brothers, Bear Stearns, Dean Witter and Morgan Stanleysold their
partnerships between 1981 and 1986. Goldman Sachs (in 1999) was one of the latest leading
investment banks to go public.
The editors of The Scandinavian Journal of Economics 2019.
F. Loss and A. Renucci 1511
1995; Lang and Gordon, 1995; Levin and Tadelis, 2005), motivate (Alchian
and Demsetz, 1972), and employ to their most efficient use (Garicano and
Santos, 2004) a unique pool of highly skilled resources in human-capital-
intensive industries.
At partner level, the “rainmaking” ability, that is, the ability to originate
clients and source deals, is essential. Thus, below-partner employees (i.e.,
associates) are tested in this dimension before they can make partner. This
gives them a great deal of autonomy in terms of which clients or patients to
serve, which cases to handle, which projects to carry out, which investments
to undertake, etc. Another feature of partnerships is that promotion to
partner level goes hand in hand with a change in compensation structure
and level: associates earn wages, whereas partners are residual claimants
of the cash flow they generate, and there is a pay gap. To illustrate, at
US law firms, the compensation of associates (and non-equity partners)
increases from $340,0000 to $980,000 when they make equity partners
(BCG Attorney Search, 2014).
In this paper, we examine the effects of associate autonomy and pay
change upon promotion on two job dimensions essential to partnership
performance: defining a business risk strategy (i.e., choosing cases, projects,
or investment risk) and exerting subsequent execution efforts. For instance,
consider venture capitalists who select portfolio firms (i.e., develop a
business risk strategy) before choosing how much resource to spend on
providing these firms with advice and contacts (i.e., execution effort).
A career concerns model allows us to incorporate these features into a
simple framework. As in the canonical model of Holmstr¨om (1999, part 1,
pp. 170–177), risk-neutral agents whose talent is incompletely known to
themselves and to the labor market exert an unobservable costly effort,
period after period.2Their output is the sum of talent, effort, and a random
shock. In each period, agents receive a wage equal to their expected output.3
They exert effort to gain a better reputation, which translates into higher
wages in the next period. Yet, we modify the canonical model along two
dimensions. In our model, before exerting effort, agents – specifically
associates – choose the risk profile of their activity. We consider two
strategies: taking on high business risk and taking on low business risk.
High business risk increases the variance, but not the expectation of the
shock to the associate’s output. Also in our two-period model, we introduce
the opportunity to make partner in the second period. Making partner
2This pattern is consistent with the case of partnership associates (Bonatti and H¨orner, 2017).
Associates are scrutinized by their peers, partners, headhunters, and the specialized press. Thus,
there is commonly available– albeit imperfect – infor mation about their talent.
3Again, this matches partnership practice.Associate compensation is not for mallytied to realized
performance through equity-like claims. The bonuses associates receive are considered for the
most part as compensation that remains identical from one year to the next.
The editors of The Scandinavian Journal of Economics 2019.

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