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Relational Contracts When the Agent's Productivity Inside the Relationship is Correlated with Outside OpportunitiesAlexander F. WagnerUniversity of Zurich - Department of Banking and Finance; Harvard University; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) May 2011 CEPR Discussion Paper No. DP8378 Abstract: An agent can choose to bear personal costs to the principal's benefit. In return, the principal offers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. The novel feature of the analysis is that the agent's productivity inside the relationship is correlated with productivity outside. The paper derives the implications of this arguably realistic assumption for the feasibility of relational contracts and for agent selection by principals. Applications of this framework to labor, management, and politics help organize some stylized facts.
Number of Pages in PDF File: 52 Keywords: Relational contracts, Repeated games JEL Classification: D23, D82, M51 working papers seriesDate posted: May 19, 2011Suggested CitationContact Information
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