Relational Contracts and the Value of Loyalty
American Economic Review · 2011 · Volume 101 · Issue 7
Abstract
This paper characterizes the optimal contract for a principal who repeatedly chooses among N potential agents under the threat of holdup. Over time, the principal would like to trade with different agents; however, the possibility of ex-post opportunism allows agents to collect rents and creates a fixed cost of initiating new relationships. In the optimal contract, the principal divides agents into "insiders" with whom she trades efficiently, and "outsiders" whom she is biased against. The optimal contract is self-enforcing if the principal is sufficiently patient and can be implemented by an "employment contract" that is robust to asymmetric information. (JEL: C73, D82, D83, D86)
Keywords
Stochastic and Dynamic Games, Evolutionary Games, Repeated Games, Asymmetric and Private Information, Search, Learning, Information and Knowledge, Communication, Belief, Economics of Contract: Theory
Enable JavaScript for citation tools and additional paper interactions.