Managing Relational Contracts

52 Pages Posted: 29 Jan 2018 Last revised: 12 Nov 2018

See all articles by Marta Troya-Martinez

Marta Troya-Martinez

New Economic School (NES); Centre for Economic Policy Research (CEPR)

Liam Wren-Lewis

Paris School of Economics (PSE)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

Abstract

Relational contracts are typically modeled as being between a principal and an agent, such as a firm owner and a supplier. Yet in a variety of organizations relationships are overseen by an intermediary such as a manager. Such arrangements open the door for collusion between the manager and the agent. This paper develops a theory of such managed relational contracts. We show that managed relational contracts differ from principal-agent ones in important ways. First, kickbacks from the agent can help solve the manager's commitment problem. When commitment is difficult, this can result in higher agent effort than the principal could incentivize directly. Second, making relationships more valuable enables more collusion and hence can reduce effort. We also analyze the principal's delegation problem and show that she may or may not benefit from entrusting the relationship to a manager.

Keywords: Corruption, delegation, Relational Contracts

JEL Classification: D73, D86, L14

Suggested Citation

Troya-Martinez, Marta and Wren-Lewis, Liam, Managing Relational Contracts (January 2018). CEPR Discussion Paper No. DP12645. Available at SSRN: https://ssrn.com/abstract=3112269

Marta Troya-Martinez (Contact Author)

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Liam Wren-Lewis

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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