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Managing Relational Contracts

Marta Troya Martinez () and Liam Wren-Lewis ()

No 12645, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Relational contracts are typically modeled as being between a principal and an agent, such as a firm owner and a supplier. Yet in a variety of organizations relationships are overseen by an intermediary such as a manager. Such arrangements open the door for collusion between the manager and the agent. This paper develops a theory of such managed relational contracts. We show that managed relational contracts differ from principal-agent ones in important ways. First, kickbacks from the agent can help solve the manager's commitment problem. When commitment is difficult, this can result in higher agent effort than the principal could incentivize directly. Second, making relationships more valuable enables more collusion and hence can reduce effort. We also analyze the principal's delegation problem and show that she may or may not benefit from entrusting the relationship to a manager.

Keywords: Corruption; delegation; Relational Contracts (search for similar items in EconPapers)
JEL-codes: D73 D86 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
Date: 2018-01
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