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Rulebooks in Relational Contracts

Jin Li (), Arijit Mukherjee () and Luis Vasconcelos ()
Additional contact information
Jin Li: Business and Economics, The University of Hong Kong, K.K.
Arijit Mukherjee: Michigan State University, Department of Economics, Postal: Department of Economics, Michigan State University, 110 Marshall-Adams Hall, 486 W. Circle Dr., East Lansing, MI 48824
Luis Vasconcelos: Department of Economics, University of Essex, Postal: Department of Economics, Michigan State University, 110 Marshall-Adams Hall, 486 W. Circle Dr., East Lansing, MI 48824

No 2019-7, Working Papers from Michigan State University, Department of Economics

Abstract: Firms can accrue large benefits by fostering worker initiative, but standardized work rules are still widely used. We present a model of relational incentives where the use of rules fluctuates over time as the firm faces shocks to its credibility. Worker initiative in adapting to local information can ensure production efficiency but also requires strong incentives. As shocks weaken relational incentives, the firm may adopt rules that yield satisfactory (though suboptimal) performance. Rules help the relationship survive the shocks, but the relationship becomes less efficient in the future. While the relationship may recover, its ability to weather future shocks deteriorates.

Keywords: Relational contracts; standardization; rules; employee initiative (search for similar items in EconPapers)
JEL-codes: D82 L23 M12 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2019-08-26
New Economics Papers: this item is included in nep-cta and nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:ris:msuecw:2019_007

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