Relational Incentive Contracts with Hidden Action and Unequal Discounting

40 Pages Posted: 23 Aug 2019

See all articles by Eric S. Chou

Eric S. Chou

National Tsing Hua University

Hideshi Itoh

Waseda Business School; CESifo (Center for Economic Studies and Ifo Institute)

Chien‐Lung Chen

Academia Sinica

Date Written: August 22, 2019

Abstract

We analyze relational incentive contracts with hidden action when the principal and the agent have different discount factors, and identify a new agency cost that exists only when they cannot commit themselves to long-term contracts and the agent is more patient than the principal. We show that there is a new trade-off between rent extraction and incentive provision, and the optimal contract may be non-stationary, even without private information or limited-liability constraints. We characterize the condition under which the trade-off exists, as well as the condition for the optimality of non-stationary contracts.

Keywords: relational contracts, hidden action, unequal discounting

JEL Classification: D86, C73

Suggested Citation

Chou, Eric S. and Itoh, Hideshi and Itoh, Hideshi and Chen, Chien‐Lung, Relational Incentive Contracts with Hidden Action and Unequal Discounting (August 22, 2019). Available at SSRN: https://ssrn.com/abstract=3441010 or http://dx.doi.org/10.2139/ssrn.3441010

Eric S. Chou

National Tsing Hua University ( email )

No. 101, Section 2, Guangfu Road, East District
Hsin Chu 3, 300
China

Hideshi Itoh (Contact Author)

Waseda Business School ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku
Tokyo, Tokyo 169-8050
Japan

HOME PAGE: http://https://www.waseda.jp/fcom/wbs/en

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Chien‐Lung Chen

Academia Sinica ( email )

Nankang
Taipei, 11529
Taiwan

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