Robust relational contracts with subjective performance evaluation

V. Bhaskar (), Wojciech Olszewski () and Thomas Wiseman
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V. Bhaskar: Department of Economics, University of Texas at Austin
Wojciech Olszewski: Department of Economics, Northwestern University

Theoretical Economics, 2024, vol. 19, issue 3

Abstract: We study a repeated principal-agent model with transferable utility, where the principal's evaluation of the agent's performance is subjective. Our focus is on equilibria which are robust to the addition of small privately observed shocks to the payoffs. Existing constructions of positive-effort equilibria are not robust to such payoff shocks. Allowing for simultaneous cheap-talk announcements makes some effort sustainable in a robust equilibrium, and payoffs can be arbitrarily close to fully efficient ones if players are sufficiently patient. In contrast to the existing literature, our near-efficient equilibria exhibit realistic features: the bonus size is reasonable, the threshold for being paid a bonus is non-trivial, and the base wage need not be negative.

Keywords: Private monitoring; repeated games; relational contracts (search for similar items in EconPapers)
JEL-codes: C73 D86 (search for similar items in EconPapers)
Date: 2024-07-24
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Working Paper: Robust relational contracts with subjective performance evaluation (2022)
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