Document Type


Publication Date



This essay examines the capital accounting of Kovacik v. Reed, leading authority addressing allocation of losses between a partner who contributed only property and another who contributed only services. Kovacik posits that such parties having agreed to share profits equally have implicitly agreed their contributions were of equal value. This essay shows that such an agreement would not produce the result Kovacik reaches. The Kovacik result is instead produced by the following implausible implicit agreement between the parties: The value of the services provided by the services partner to be treated as a capital contribution equals the amount the partnership loses on a cash basis. The more the firm ultimately loses, the more those services are agreed to be worth. Prior work by Bainbridge identifies a manifestation in this context of a problem referenced as overinvestment in the financial economics literature. This essay further demonstrates the Kovacik result can create a complementary underinvestment problem.

Included in

Contracts Commons



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.