The Demand and Supply of Favours in Dynamic Relationships

Jean Guillaume Forand and Jan Zapal

No 1705, Working Papers from University of Waterloo, Department of Economics

Abstract: We characterise the optimal demand and supply of favours in a dynamic principal-agent model of joint production, in which heterogenous project opportunities arrive stochastically and are publicly observed upon arrival, utility from these projects is non-transferable and commitment to future production is limited. Our results characterise the optimal dynamic contract, and we establish that the principal's supply of favours (the production of projects that benefit the agent but not the principal) is backloaded, that the principal's demand for favours (the production of projects that benefit the principal but not the agent) is frontloaded, and that the production of projects is ordered by their comparative advantage, that is, by their associated efficiency in extracting (for demanded projects) and providing (for supplied projects) utility to the agent. Furthermore, we provide an exact construction of the optimal contract when project opportunities follow a Markov process.

JEL-codes: C73 D86 L24 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2017-09, Revised 2017-09
New Economics Papers: this item is included in nep-mic, nep-ppm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://uwaterloo.ca/economics/sites/ca.economics/ ... _dynamic_favours.pdf (application/pdf)

Related works:
Working Paper: The Demand and Supply of Favours in Dynamic Relationships (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wat:wpaper:1705

Access Statistics for this paper

More papers in Working Papers from University of Waterloo, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sherri Anne Arsenault ().