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Commitment and discretion in contracts: theory and evidence from retirement plans

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  • Jin‐Hyuk Kim
  • Nick Vikander

Abstract

We consider a firm's problem of incentivizing its workforce through relational contracts, when workers effectively face a shorter time horizon due to possible separation shocks. Commitment issues then generate a trade‐off between efficiency and distribution, which affects both performance and profits. Profits under relational contracting can exceed those under formal contracting, despite lower performance, when discounting is moderate, firm bargaining power is weak, and shocks are likely. Using a matched employer–retirement plan dataset, and interpreting discretionary profit‐sharing plans and employee stock ownership plans as relational and formal contracting, respectively, we find some support for our predictions.

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  • 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.
    • Handle: RePEc:bla:scandj:v:125:y:2023:i:2:p:461-488
    DOI: 10.1111/sjoe.12523
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