Relational Contracts: Public versus Private Savings

Francesc Dilme and Daniel Garrett ()
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Daniel Garrett: University of Essex

No 192, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Work on relational employment agreements often predicts low payments or termination for poor performance. The possibility of saving can, however, limit the e˙ectiveness of mone-tary incentives in motivating an employee with diminishing marginal utility for consump-tion. We study the role of savings and their observability in optimal relational contracts. We focus on the case where players are not too patient, and hence the constant first-best e˙ort cannot be implemented. If savings are hidden, the relationship eventually deterio-rates over time. In particular, both payments and e˙ort decline. On the other hand, if savings are public, consumption is initially high, so the agent’s savings fall over time, and e˙ort and payments to the agent increase. The findings thus suggest how tacit agreements on consumption can forestall the deterioration of dynamic relationships in which the agent can save.

Keywords: relational contracts; consumption smoothing preferences; private savings (search for similar items in EconPapers)
JEL-codes: C73 J30 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2022-08
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-mic and nep-upt
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_192_2022.pdf First version, 2022 (application/pdf)

Related works:
Journal Article: Relational Contracts: Public versus Private Savings (2023)
Working Paper: Relational Contracts: Public versus Private Savings (2020)
Working Paper: Relational Contracts: Public Versus Private Savings (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:192

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