The allocation of future business: Dynamic relational contracts with multiple agents

Isaiah Andrews; Daniel Barron

doi:10.1257/aer.20131082

The allocation of future business: Dynamic relational contracts with multiple agents

Isaiah Andrews^*, Daniel Barron

^*Corresponding author for this work

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Research output: Contribution to journal › Review article › peer-review

24 Scopus citations

Abstract

We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. Thisallocation rule performs strictly better than any rule that depends only on payoff-relevant information. (JEL D21, D82, L14, L24).

Original language	English (US)
Pages (from-to)	2742-2759
Number of pages	18
Journal	American Economic Review
Volume	106
Issue number	9
DOIs	https://doi.org/10.1257/aer.20131082
State	Published - Sep 2016

Funding

We are tremendously indebted to Bob Gibbons, Juuso Toikka, and Glenn Ellison for advice, insight, and support. Special thanks to Simon Board, Alessandro Bonatti, Gabriel Carroll, Sebastian Di Tella, Sambuddha Ghosh, Marina Halac, Anton Kolotilin, Ruitian Lang, Greg Leiserson, Hongyi Li, James Malcomson, Mike Powell, Luis Rayo, Larry Samuelson, Eric Van den Steen, Sarah Venables, Xiao Yu Wang, Joel Watson, Nils Wernerfelt, Birger Wernerfelt, Alexander Wolitzky, and Luis Zermeno. Thanks to participants in seminars at MIT, LSE, Harvard Business School, Rochester, Northwestern, UCSD, Washington University St. Louis, Notre Dame, Boston University, Yale, and Columbia. Andrews gratefully acknowledges NSF Graduate Research Fellowship support under Grant No. 1122374. Barron gratefully acknowledges support from the Cowles Foundation at Yale University while writing this paper. Remaining errors are our own. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.

ASJC Scopus subject areas

Economics and Econometrics

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10.1257/aer.20131082

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title = "The allocation of future business: Dynamic relational contracts with multiple agents",

abstract = "We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. Thisallocation rule performs strictly better than any rule that depends only on payoff-relevant information. (JEL D21, D82, L14, L24).",

author = "Isaiah Andrews and Daniel Barron",

note = "Funding Information: We are tremendously indebted to Bob Gibbons, Juuso Toikka, and Glenn Ellison for advice, insight, and support. Special thanks to Simon Board, Alessandro Bonatti, Gabriel Carroll, Sebastian Di Tella, Sambuddha Ghosh, Marina Halac, Anton Kolotilin, Ruitian Lang, Greg Leiserson, Hongyi Li, James Malcomson, Mike Powell, Luis Rayo, Larry Samuelson, Eric Van den Steen, Sarah Venables, Xiao Yu Wang, Joel Watson, Nils Wernerfelt, Birger Wernerfelt, Alexander Wolitzky, and Luis Zermeno. Thanks to participants in seminars at MIT, LSE, Harvard Business School, Rochester, Northwestern, UCSD, Washington University St. Louis, Notre Dame, Boston University, Yale, and Columbia. Andrews gratefully acknowledges NSF Graduate Research Fellowship support under Grant No. 1122374. Barron gratefully acknowledges support from the Cowles Foundation at Yale University while writing this paper. Remaining errors are our own. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.",

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N2 - We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. Thisallocation rule performs strictly better than any rule that depends only on payoff-relevant information. (JEL D21, D82, L14, L24).

AB - We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. Thisallocation rule performs strictly better than any rule that depends only on payoff-relevant information. (JEL D21, D82, L14, L24).

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The allocation of future business: Dynamic relational contracts with multiple agents

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