Abstract
We consider how a firm's policies constrain its relational contracts. A policy is a sequence of decisions made by a principal; each decision determines how agents' efforts affect their outputs. We consider surplus- maximizing policies in a flexible dynamic moral hazard problem between a principal and several agents with unrestricted vertical transfers and no commitment. If agents cannot coordinate to punish the principal following a deviation, then the principal might optimally implement dynamically inefficient, history-dependent policies to credibly reward high-performing agents. We develop conditions under which such backward-looking policies are surplus-maximizing and illustrate how they influence promotions, hiring, and performance.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 228-249 |
| Number of pages | 22 |
| Journal | American Economic Journal: Microeconomics |
| Volume | 11 |
| Issue number | 2 |
| DOIs | |
| State | Published - May 1 2019 |
Funding
* Barron: Kellogg School of Management, Northwestern University, 2211 Campus Drive, Evanston, IL 60208 (email: [email protected]); Powell: Kellogg School of Management, Northwestern University, 2211 Campus Drive, Evanston, IL 60208 (email: [email protected]). Johannes Hörner was the coeditor for this article. We thank three anonymous referees for their comments. The authors would like to thank Nageeb Ali, Joyee Deb, Willie Fuchs, John Geanakoplos, Bob Gibbons, Yingni Guo, Marina Halac, Jin Li, Elliot Lipnowski, Jim Malcomson, David Miller, Niko Matouschek, Luis Rayo, Larry Samuelson, Takuo Sugaya, Michael Waldman, Joel Watson, and Alexander Wolitzky for very helpful comments and discussion. Thanks also to participants in many seminars and conferences. Barron gratefully acknowledges support from the Yale University Cowles Foundation while working on this paper.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)