Managing conflicts in relational contracts

Research output: Contribution to journalArticlepeer-review

39 Scopus citations


A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict. Finally, we show that liquidity constraints limit the manager's ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less.

Original languageEnglish (US)
Pages (from-to)2328-2351
Number of pages24
JournalAmerican Economic Review
Issue number6
StatePublished - Oct 2013

ASJC Scopus subject areas

  • Economics and Econometrics


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