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Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities

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  • Wagner, Alexander F.

Abstract

An agent can choose to forego benefits from side opportunities and to instead provide benefits to the principal. In return, the principal offers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. This model allows the agent's productivity in contractible and possibly also non-contractible actions inside the relationship to be correlated with productivity in side activities. This arguably realistic assumption yields several novel implications for the feasibility of relational contracts and for agent selection by principals. The analysis reveals, for example, that optimal agent productivity is often non-monotonic in the importance, to the principal, of ensuring agent reliability.

Suggested Citation

  • Wagner, Alexander F., 2011. "Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities," CEPR Discussion Papers 8378, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8378
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    More about this item

    Keywords

    Relational contracts; Repeated games;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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