The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents

Isaiah Andrews and Daniel Barron

American Economic Review, 2016, vol. 106, issue 9, 2742-59

Abstract: We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. This allocation rule performs strictly better than any rule that depends only on payoff-relevant information.

JEL-codes: D21 D82 L14 L24 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20131082
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Citations: View citations in EconPapers (24)

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