Inside The Black Box: Partnerships in Rio de Janeiro, 1870-1891

We use detailed newly-constructed data on partnership contracts in Rio de Janeiro in the late nineteenth century to examine differences between limited and unlimited liability firms and partners as well as to trace the effects of changes in the economic environment on contractual terms. We find that virtually all partners, regardless of liability status, contributed capital and received profit shares. In addition, most partners, including non-working limited liability partners, received a contractually guaranteed periodic salary. We also find that relative to unlimited liability partners, limited liability partners received lower profit shares and salaries and contributed more capital. Furthermore, unlimited liability partners in limited liability firms generally received more favourable terms compared with unlimited liability partners in unlimited liability firms. These findings highlight the role of income smoothing and incentives in shaping contractual terms. Finally, we assess the impact of a major institutional reform that facilitated the formation of joint stock companies on the terms of partnership contracts, and find suggestive evidence that the reforms reduced the extent of income smoothing for the limited partner and increased the average quality of unlimited liability partners in limited liability firms.