Relational Contracts with Private Information On the Future Value of the Relationship

Fahn, Matthias und Klein, Nicolas (2018): Relational Contracts with Private Information On the Future Value of the Relationship. The Upside of Implicit Downsizing Costs. Collaborative Research Center Transregio 190, Discussion Paper No. 106

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.

• Dokumententyp: Paper
• Keywords: relational contracts; sequential inefficiencies; downsizing
• Fakultät: Volkswirtschaft > Collaborative Research Center Transregio "Rationality and Competition"
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: C73, D86
• Sprache: Englisch