The Time Structure of Self-Enforcing Agreements
Econometrica · 2002 · Volume 70 · Issue 2
Abstract
A principal and an agent enter into a sequence of agreements. The principal faces an interim participation constraint at each date, but can commit to the current agreement; in contrast, the agent has the opportunity to renege on the current agreement. We study the time structure of agreement sequences that satisfy participation and no-deviation constraints and are (constrained) efficient. We show that every such sequence must, after a finite number of dates, exhibit a continuation that maximizes theagent'spayoff over all such efficient, self-enforcing sequences. Additional results are provided for situations with transferable payoffs.
Keywords
contracts, constrained efficiency, principal-agent theory, limited enforcement, dynamic incentives
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