Relational Contracts When the Agent's Productivity Inside the Relationship is Correlated with Outside Opportunities
Alexander F. Wagner
University of Zurich - Department of Banking and Finance; Harvard University; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
CEPR Discussion Paper No. DP8378
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, M51working papers series
Date posted: May 19, 2011
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