Consider a repeated moral hazard problem involving a principal and several agents. If formal contracts are unavailable and agents observe only their own relationships, an optimal relational contract allocates business among agents depending on past performance. If first-best is attainable, the principal favors an agent who performs well with future business, even if he later performs poorly. The agent loses favor only if he cannot produce and a replacement performs well. If first-best is unattainable, some relationships may deteriorate into persistent low effort. In the first best, the principal need not conceal information from agents; otherwise, she optimally conceals information.
|Original language||English (US)|
|Number of pages||50|
|State||Published - Apr 21 2014|