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Robust relational contracts with subjective performance evaluation

Author

Listed:
  • Bhaskar, V.

    (Department of Economics, University of Texas at Austin)

  • Olszewski, Wojciech

    (Department of Economics, Northwestern University)

  • Wiseman, Thomas

    (Department of Economics, University of Texas at Austin)

Abstract

We study a repeated principal-agent model with transferable utility, where the principal's evaluation of the agent's performance is subjective. Our focus is on equilibria which are robust to the addition of small privately observed shocks to the payoffs. Existing constructions of positive-effort equilibria are not robust to such payoff shocks. Allowing for simultaneous cheap-talk announcements makes some effort sustainable in a robust equilibrium, and payoffs can be arbitrarily close to fully efficient ones if players are sufficiently patient. In contrast to the existing literature, our near-efficient equilibria exhibit realistic features: the bonus size is reasonable, the threshold for being paid a bonus is non-trivial, and the base wage need not be negative.

Suggested Citation

  • Bhaskar, V. & Olszewski, Wojciech & Wiseman, Thomas, 2024. "Robust relational contracts with subjective performance evaluation," Theoretical Economics, Econometric Society, vol. 19(3), July.
    • Handle: RePEc:the:publsh:5911
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    References listed on IDEAS

    as
    1. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    2. Johannes Hörner & Wojciech Olszewski, 2006. "The Folk Theorem for Games with Private Almost-Perfect Monitoring," Econometrica, Econometric Society, vol. 74(6), pages 1499-1544, November.
    3. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-1733, November.
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    More about this item

    Keywords

    Private monitoring; repeated games; relational contracts;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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