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

Isaiah Andrews*, Daniel Barron

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

5 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 languageEnglish (US)
Pages (from-to)2742-2759
Number of pages18
JournalAmerican Economic Review
Volume106
Issue number9
DOIs
StatePublished - Sep 2016

ASJC Scopus subject areas

  • Economics and Econometrics

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