Commitment and discretion in contracts: theory and evidence from retirement plans

Jin‐Hyuk Kim and Nick Vikander

Scandinavian Journal of Economics, 2023, vol. 125, issue 2, 461-488

Abstract: We consider a firm's problem of incentivizing its workforce through relational contracts, when workers effectively face a shorter time horizon due to possible separation shocks. Commitment issues then generate a trade‐off between efficiency and distribution, which affects both performance and profits. Profits under relational contracting can exceed those under formal contracting, despite lower performance, when discounting is moderate, firm bargaining power is weak, and shocks are likely. Using a matched employer–retirement plan dataset, and interpreting discretionary profit‐sharing plans and employee stock ownership plans as relational and formal contracting, respectively, we find some support for our predictions.

Date: 2023
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