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Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs

Matthias Fahn () and Nicolas Klein ()

No 2017-14, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.

Keywords: Self-Control Problems; Teamwork; Relational Contracts. (search for similar items in EconPapers)
JEL-codes: L22 L23 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-07
New Economics Papers: this item is included in nep-cta and nep-mic
Note: English
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Related works:
Journal Article: Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs (2019) Downloads
Working Paper: Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:jku:econwp:2017_14

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