Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities

Alexander Wagner

No 8378, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: An agent can choose to forego benefits from side opportunities and to instead provide benefits to the principal. In return, the principal offers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. This model allows the agent's productivity in contractible and possibly also non-contractible actions inside the relationship to be correlated with productivity in side activities. This arguably realistic assumption yields several novel implications for the feasibility of relational contracts and for agent selection by principals. The analysis reveals, for example, that optimal agent productivity is often non-monotonic in the importance, to the principal, of ensuring agent reliability.

Keywords: Relational contracts; Repeated games (search for similar items in EconPapers)
JEL-codes: D23 D82 M51 (search for similar items in EconPapers)
Date: 2011-05
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