Managing Relational Contracts
60 Pages Posted: 29 Jan 2018 Last revised: 14 May 2021
Date Written: January 2018
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.
JEL Classification: D73, D86, L14
Suggested Citation: Suggested Citation