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Investing in a relationship

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  • Marina Halac

Abstract

type="main"> A principal can make an investment anticipating a repeated relationship with an agent, but the agent may appropriate the returns through ex post bargaining. I study how this holdup problem and efficiency depend on the contracting environment. When investment returns are observable, informal contracts ex post can be more efficient than formal contracts, as they induce higher investment ex ante: the principal invests not only to generate direct returns, but also to improve relational incentives. Unobservability of returns increases the principal's ability to appropriate the returns but reduces her ability to improve incentives. The optimal information structure depends on bargaining power.

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  • Marina Halac, 2015. "Investing in a relationship," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 165-185, March.
    • Handle: RePEc:bla:randje:v:46:y:2015:i:1:p:165-185
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12080
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    1. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    2. Francesc Dilmé & Daniel F. Garrett, 2023. "Relational Contracts: Public versus Private Savings," Econometrica, Econometric Society, vol. 91(3), pages 1025-1075, May.
    3. repec:hal:spmain:info:hdl:2441/d3pr45c1e8egae1q88dc5jo6u is not listed on IDEAS
    4. Englmaier, Florian & Fahn, Matthias, 2014. "Size Matters - “Over†investments in a Relational Contracting Setting," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 506, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
    6. Jin‐Hyuk Kim & Nick Vikander, 2023. "Commitment and discretion in contracts: theory and evidence from retirement plans," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(2), pages 461-488, April.
    7. Russo, Giovanni & Van Houten, Gijs, 2021. "Complex Job Design and Layers of Hierarchy," IZA Discussion Papers 14455, Institute of Labor Economics (IZA).
    8. Glover, Jonathan & Xue, Hao, 2023. "Accounting conservatism and relational contracting," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    9. Florian Englmaier & Matthias Fahn, 2015. "Size Matters - "Over"investments in a Relational Contracting Setting," CESifo Working Paper Series 5154, CESifo.
    10. Cristina Nistor & Matthew Selove, 2020. "Pricing and Quality Provision in a Supply Relationship: A Model of Efficient Relational Contracts," Marketing Science, INFORMS, vol. 39(5), pages 939-955, September.
    11. Benoît, Jean-Pierre & Galbiati, Roberto & Henry, Emeric, 2017. "Investing to cooperate: Theory and experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 1-17.
    12. Daniel Barron & Jin Li & Michał Zator, 2022. "Morale and Debt Dynamics," Management Science, INFORMS, vol. 68(6), pages 4496-4516, June.
    13. Bård Harstad & Francesco Lancia & Alessia Russo, 2019. "Compliance Technology and Self-enforcing Agreements," Journal of the European Economic Association, European Economic Association, vol. 17(1), pages 1-29.
    14. Lancia Francesco & Russo Alessia, 2019. "Sustaining Cooperation Through Strategic Self-Interested Actions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(2), pages 1-11, June.
    15. Halonen-Akatwijuka, Maija & Pafilis, Evagelos, 2020. "Common ownership of public goods," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 555-578.
    16. Palermo, Alberto, 2016. "Hold-up in vertical hierarchies with adverse selection," Economics Letters, Elsevier, vol. 148(C), pages 91-95.
    17. repec:hal:spmain:info:hdl:2441/59r8grug28881rf8or7715f88g is not listed on IDEAS
    18. Malodia, Suresh & Dhir, Amandeep & Mishra, Mahima & Bhatti, Zeeshan Ahmed, 2021. "Future of e-Government: An integrated conceptual framework," Technological Forecasting and Social Change, Elsevier, vol. 173(C).
    19. Goldlücke, Susanne & Kranz, Sebastian, 2017. "Reconciliating Relational Contracting and Hold-up: A Model of Repeated Negotiations," CEPR Discussion Papers 12540, C.E.P.R. Discussion Papers.
    20. Harstad, Bård & Lancia, Francesco & Russo, Alessia, 2022. "Prices vs. quantities for self-enforcing agreements," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).

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