Policies in relational contracts

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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 languageEnglish (US)
Pages (from-to)228-249
Number of pages22
JournalAmerican Economic Journal: Microeconomics
Volume11
Issue number2
DOIs
Publication statusPublished - May 1 2019

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ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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