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Revealing the Value of Relationships

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  • Marina Halac

Abstract

This paper studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I examine a simplified, two-period version of the principal-agent model of Halac (2012), in which the principal has persistent private information about her outside option. The results capture the main lessons, showing why inefficiencies necessarily arise and how they depend on the parties' bargaining powers. When parties care enough about the future, revealing the value of the relationship requires the informed principal to have bargaining power, and to sometimes renege on her promises.

Suggested Citation

  • Marina Halac, 2023. "Revealing the Value of Relationships," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 661-672.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2023-0047
    DOI: 10.1628/jite-2023-0047
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    More about this item

    Keywords

    relational contracts; incomplete information; bargaining power; relationalcontracts; incompleteinformation; bargainingpower;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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