IDEAS home Printed from https://ideas.repec.org/a/wly/iecrev/v54y2013i2p525-547.html
   My bibliography  Save this article

Nonstationary Relational Contracts With Adverse Selection

Author

Listed:
  • Huanxing Yang

Abstract

I develop a model of nonstationary relational contracts in order to study internal wage dynamics. Workers are heterogeneous, and each worker’s ability is both private information and fixed for all time. Learning therefore occurs within employment relationships. The inferences, however, are confounded by moral hazard. Incentive provision is restricted by an inability to commit to long‐term contracts. Relational contracts, which must be self‐enforcing, must therefore be used. The wage dynamics in the optimal contract, which are pinned down by the tension between incentive provision and contractual enforcement, are intimately related to the learning effect.

Suggested Citation

  • Huanxing Yang, 2013. "Nonstationary Relational Contracts With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 525-547, May.
    • Handle: RePEc:wly:iecrev:v:54:y:2013:i:2:p:525-547
    DOI: iere.12005
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/iere.12005
    Download Restriction: no
    File URL: https://libkey.io/iere.12005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Huanxing Yang, 2008. "Efficiency Wages And Subjective Performance Pay," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 179-196, April.
    2. Dan Bernhardt, 1995. "Strategic Promotion and Compensation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(2), pages 315-339.
    3. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    4. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," NBER Chapters, in: Investment in Human Beings, pages 9-49, National Bureau of Economic Research, Inc.
    5. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(4), pages 597-625.
    6. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4, National Bureau of Economic Research, Inc.
    7. Parikshit Ghosh & Debraj Ray, 1996. "Cooperation in Community Interaction Without Information Flows," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 491-519.
    8. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    9. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(2), pages 415-441.
    10. Marina Halac, 2012. "Relational Contracts and the Value of Relationships," American Economic Review, American Economic Association, vol. 102(2), pages 750-779, April.
    11. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    12. Sylvain Chassang, 2010. "Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 448-465, March.
    13. Henry S. Farber & Robert Gibbons, 1996. "Learning and Wage Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1007-1047.
    14. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    15. MacLeod, W Bentley & Malcomson, James M, 1988. "Reputation and Hierarchy in Dynamic Models of Employment," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 832-854, August.
    16. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1.
    17. Bruce C. Greenwald, 1986. "Adverse Selection in the Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(3), pages 325-347.
    18. Jonathan P Thomas & Tim Worrall, 2010. "Dynamic Relational Contracts with Credit Constraints," Economics Discussion Paper Series 1009, Economics, The University of Manchester.
    19. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    20. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    21. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    22. Jacob A. Mincer, 1974. "Age and Experience Profiles of Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 64-82, National Bureau of Economic Research, Inc.
    23. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 145-176, February.
    24. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    25. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
    26. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    27. Kranton, Rachel E, 1996. "The Formation of Cooperative Relationships," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(1), pages 214-233, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Fischer‐Thöne, 2023. "Optimal Payment Contracts In Trade Relationships," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1649-1683, November.
    2. Jin Li & Niko Matouschek & Michael Powell, 2017. "Power Dynamics in Organizations," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 217-241, February.
    3. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    4. Fong, Yuk-fai & Li, Jin, 2017. "Relational contracts, limited liability, and employment dynamics," Journal of Economic Theory, Elsevier, vol. 169(C), pages 270-293.
    5. Mariya Bondareva & Edieal Pinker, 2019. "Dynamic Relational Contracts for Quality Enforcement in Supply Chains," Management Science, INFORMS, vol. 65(3), pages 1305-1321, March.
    6. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    7. Radoslawa Nikolowa, 2017. "Motivate and select: Relational contracts with persistent types," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 624-635, September.
    8. Martimort, David & Semenov, Aggey & Stole, Lars, 2017. "Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection," Economics Letters, Elsevier, vol. 159(C), pages 18-22.
    9. James M. Malcomson, 2016. "Relational Incentive Contracts With Persistent Private Information," Econometrica, Econometric Society, vol. 84, pages 317-346, January.
    10. Erkal, Nisvan & Wu, Steven Y. & Roe, Brian E., 2014. "Strategic Incomplete Contracts: Theory and Experiments," IZA Discussion Papers 8704, Institute of Labor Economics (IZA).
    11. Jed DeVaro & Jin-Hyuk Kim & Nick Vikander, 2014. "Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting," Discussion Papers 14-13, University of Copenhagen. Department of Economics.
    12. Li, Jin & Mukherjee, Arijit & Vasconcelos, Luis, 2019. "Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking," Working Papers 2018-12, Michigan State University, Department of Economics.
    13. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    2. Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
    3. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, April.
    4. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    5. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    7. Baptista, Rui & Lima, Francisco & Preto, Miguel Torres, 2012. "How former business owners fare in the labor market? Job assignment and earnings," European Economic Review, Elsevier, vol. 56(2), pages 263-276.
    8. Dohmen, Thomas J., 2004. "Performance, seniority, and wages: formal salary systems and individual earnings profiles," Labour Economics, Elsevier, vol. 11(6), pages 741-763, December.
    9. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    10. Alan Benson & Ben A. Rissing, 2020. "Strength from Within: Internal Mobility and the Retention of High Performers," Organization Science, INFORMS, vol. 31(6), pages 1475-1496, November.
    11. MacLeod, W. Bentley & Urquiola, Miguel, 2012. "Anti-Lemons: School Reputation, Relative Diversity, and Educational Quality," IZA Discussion Papers 6805, Institute of Labor Economics (IZA).
    12. repec:eee:labchp:v:3:y:1999:i:pb:p:2439-2483 is not listed on IDEAS
    13. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    14. Braz Camargo & Elena Pastorino & Fabian Lange, 2018. "Earnings Dynamics: the Role of Learning, Human Capital, and Performance Incentives," 2018 Meeting Papers 581, Society for Economic Dynamics.
    15. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 20, pages 1769-1823, Elsevier.
    16. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91-147.
    17. Alessandro Bonatti & Johannes Horner, 2011. "Career Concerns with Coarse Information," Cowles Foundation Discussion Papers 1831, Cowles Foundation for Research in Economics, Yale University, revised Jan 2012.
    18. Robert Gibbons & Michael Waldman, 1998. "A Theory of Wage and Promotion Dynamics in Internal Labor Markets," NBER Working Papers 6454, National Bureau of Economic Research, Inc.
    19. Parent, Daniel, 2002. "Matching, human capital, and the covariance structure of earnings," Labour Economics, Elsevier, vol. 9(3), pages 375-404, July.
    20. Braga, Breno, 2018. "Earnings dynamics: The role of education throughout a worker’s career," Labour Economics, Elsevier, vol. 52(C), pages 83-97.
    21. Roland A. Amann & Tobias J. Klein, 2012. "Returns to type or tenure?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 175(1), pages 153-166, January.
    22. Jäger, Simon & Heining, Jörg, 2019. "How Substitutable Are Workers? Evidence from Worker Deaths," MPRA Paper 109757, University Library of Munich, Germany, revised 01 Jan 2019.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:iecrev:v:54:y:2013:i:2:p:525-547. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.