Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs

Matthias Fahn and Nicolas Klein

American Economic Journal: Microeconomics, 2019, vol. 11, issue 4, 33-58

Abstract: We analyze a relational-contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.

JEL-codes: D23 D82 D86 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mic.20170294
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs (2017)
Working Paper: Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs (2017)
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