Relational Contracts and Competitive Screening

38 Pages Posted: 7 Oct 2009

See all articles by Giacomo Calzolari

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Date Written: August 2009

Abstract

We study the tension between competitive screening and contract enforcement where a principal trades repeatedly with one among several agents, moral hazard and adverse selection coexist, and non-contractible dimensions are governed by relational contracting. We simultaneously characterize optimal relational contracts and competitive screening policies which are interdependent. When non-contractible dimensions are important, the principal optimally restricts competitive screening to a subset of 'loyal' agents, giving up performance bonuses and, when such dimensions are crucial, negotiates an indefinitely renewable contract with one agent. To enhance enforcement, explicit contract duration is also reduced. However, these policies facilitate collusion among agents, which induces an additional trade-off between reputational forces and collusion. When non-contractible dimensions are very important this last trade-off may disappear, as collusion allows more efficient enforcement of better performance.

Keywords: auctions, collusion, contract duration, efficiency wages, implicit and incomplete contracts, Limited enforcement, Loyalty, Multi-tasking, Negotiation, Non-contractible quality, Performance bonus, Procurement, Relational contracts, Reputation, Screening

JEL Classification: C73, D86, L14

Suggested Citation

Calzolari, Giacomo and Spagnolo, Giancarlo, Relational Contracts and Competitive Screening (August 2009). CEPR Discussion Paper No. DP7434, Available at SSRN: https://ssrn.com/abstract=1484466

Giacomo Calzolari (Contact Author)

European University Institute - Economics Department (ECO) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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University of Bologna ( email )

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Giancarlo Spagnolo

Stockholm School of Economics (SITE) ( email )

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Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

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United Kingdom

University of Rome 'Tor Vergata' ( email )

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Italy

EIEF ( email )

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