Relational contracts, limited liability, and employment dynamics

Yuk-fai Fong and Jin Li

Journal of Economic Theory, 2017, vol. 169, issue C, 270-293

Abstract: This paper studies a relational contracting model in which the agent is protected by a limited liability constraint. The agent's effort is his private information and affects output stochastically. We characterize the optimal relational contract and compare the dynamics of the relationship with that under the optimal long-term contract. Under the optimal relational contract, the relationship is less likely to survive, and the surviving relationship is less efficient. In addition, relationships always converge to a steady state under the optimal long-term contract, but they can cycle among different phases under the optimal relational contract.

Keywords: Relational contracts; Limited liability; Efficiency wages (search for similar items in EconPapers)
JEL-codes: C61 C73 J33 L24 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:169:y:2017:i:c:p:270-293

DOI: 10.1016/j.jet.2017.02.006

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