Relational Contracts and Hierarchy

Chongwoo Choe and Shingo Ishiguro ()
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Shingo Ishiguro: Osaka University, Graduate School of Economics

No 2022-08, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We study optimal organization design with one principal and two agents, who interact through long-term relational contracts. In centralization, the principal contracts with both agents. In hierarchy, the principal contracts with one agent, who is delegated authority to contract with the other agent. We derive necessary and sufficient conditions for each organizational structure to achieve the first best. Hierarchy outperforms centralization when players are sufficiently patient and business conditions are favorable enough to alleviate agents’ incentive problems. We apply our theory to evaluate the two contrasting models of supplier networks in the automotive industry in Japan and the US.

Keywords: Relational Contracts; Centralization; Hierarchy; Supplier Networks (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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