Making and Breaking Promises when their Costs Are Private Information

Jin Li and Niko Matouschek

Journal of Institutional and Theoretical Economics (JITE), 2023, vol. 179, issue 3-4, 639-660

Abstract: We discuss how to maintain trust when promise-makers are privately informed about the costs of keeping their promises and efficient transfers are not feasible. To this end, we present a simplified version of the model in Li and Matouschek (2013) in which a principal and an agent are in an infinitely repeated relationship. The agent's effort and output are observable but not contractible and the principal is privately informed about the cost of paying the agent. We characterize the optimal relational contract, illustrate the methods used in solving games with one-sided asymmetric information and inefficient transfers, and discuss further applications.

Keywords: relational contracts; imperfect monitoring; relationalcontracts; imperfectmonitoring (search for similar items in EconPapers)
JEL-codes: C73 D23 D82 J33 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1628/jite-2023-0046

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