IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v92y2015icp122-137.html
   My bibliography  Save this article

Relational incentive contracts with productivity shocks

Author

Listed:
  • Malcomson, James M.

Abstract

This paper extends Levin's (2003) relational contract model by having not only the agent's cost of effort (agent's type), but also the value of that effort to the principal (principal's type) subject to i.i.d. shocks. When optimal effort is fully pooled across agent types for multiple principal types, it is also pooled across those principal types. When optimal effort separates some agent types for multiple principal types, efforts of those agent types may be separated across principal types. But then, somewhat perversely, some agent type's effort is decreasing in the principal's value of effort. When agent type is uniformly distributed, that applies to agent types with lower effort cost, so reducing the difference in effort between low and high effort cost types. This result extends to the principal's type being observed only by the principal if the marginal cost of effort to the agent is sufficiently convex.

Suggested Citation

  • Malcomson, James M., 2015. "Relational incentive contracts with productivity shocks," Games and Economic Behavior, Elsevier, vol. 92(C), pages 122-137.
    • Handle: RePEc:eee:gamebe:v:92:y:2015:i:c:p:122-137
    DOI: 10.1016/j.geb.2015.06.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0899825615000913
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.geb.2015.06.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    2. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
    3. Makoto Hanazono & Huanxing Yang, 2007. "Collusion, Fluctuating Demand, And Price Rigidity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 483-515, May.
    4. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    5. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    6. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    7. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372, Elsevier.
    8. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    9. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    2. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    3. Matthias Fahn & Nicolas Klein, 2019. "Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 33-58, November.
    4. Macchiavello, Rocco & Morjaria, Ameet, 2022. "Empirical approaches to trust and relational contracts," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    5. Bergman, Mats A. & Johansson, Per & Lundberg, Sofia & Spagnolo, Giancarlo, 2016. "Privatization and quality: Evidence from elderly care in Sweden," Journal of Health Economics, Elsevier, vol. 49(C), pages 109-119.
    6. 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.
    7. De Chiara, Alessandro, 2020. "Precontractual investment and modes of procurement," European Economic Review, Elsevier, vol. 124(C).
    8. Jean‐Marc Bourgeon & Pierre Picard, 2020. "Insurance law and incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1253-1286, December.
    9. Rodrigo Carril & Andres Gonzalez-Lira & Michael S. Walker, 2022. "Competition under Incomplete Contracts and the Design of Procurement Policies," Working Papers 1327, Barcelona School of Economics.
    10. Fahn, Matthias & Klein, Nicolas, 2018. "Relational Contracts with Private Information On the Future Value of the Relationship," Rationality and Competition Discussion Paper Series 106, CRC TRR 190 Rationality and Competition.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 816-852.
    2. Spagnolo, Giancarlo, 2005. "Managerial incentives and collusive behavior," European Economic Review, Elsevier, vol. 49(6), pages 1501-1523, August.
    3. James M. Malcomson, 2016. "Relational Incentive Contracts With Persistent Private Information," Econometrica, Econometric Society, vol. 84, pages 317-346, January.
    4. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    5. Kolotilin, Anton & Li, Hongyi, 2021. "Relational communication," Theoretical Economics, Econometric Society, vol. 16(4), November.
    6. Wagner, Alexander F., 2011. "Board independence and competence," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 71-93, January.
    7. Fahn, Matthias & Schade, Anne & Schüßler, Katharina, 2017. "Gift exchange vs. repeated interaction as a source of reciprocal behavior," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168150, Verein für Socialpolitik / German Economic Association.
    8. Susanne Goldlücke & Sebastian Kranz, 2018. "Discounted stochastic games with voluntary transfers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(1), pages 235-263, July.
    9. Matthias Fahn & Valeria Merlo & Georg Wamser, 2019. "The Commitment Role of Equity Financing," Journal of the European Economic Association, European Economic Association, vol. 17(4), pages 1232-1260.
    10. Matthias Fahn & Nicolas Klein, 2019. "Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 33-58, November.
    11. 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.
    12. Malcomson, James M., 2015. "Relational contracts and specific training," Research in Economics, Elsevier, vol. 69(1), pages 51-62.
    13. Matthias Fahn & Hendrik Hakenes, 2019. "Teamwork as a Self-Disciplining Device," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 1-32, November.
    14. David G. Pearce, 1991. "Repeated Games: Cooperation and Rationality," Cowles Foundation Discussion Papers 983, Cowles Foundation for Research in Economics, Yale University.
    15. Fahn, Matthias, 2019. "Reciprocity in Dynamic Employment Relationships," Rationality and Competition Discussion Paper Series 198, CRC TRR 190 Rationality and Competition.
    16. Bart S. Vanneste & Douglas H. Frank, 2014. "Forgiveness in Vertical Relationships: Incentive and Termination Effects," Organization Science, INFORMS, vol. 25(6), pages 1807-1822, December.
    17. Nisvan Erkal & Steven Y. Wu & Brian E. Roe, 2022. "Correction to: Putting relational contract theory to the test: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 140-140, February.
    18. Zhao, Rui R., 2012. "Renegotiation and conflict resolution in relational contracting," Games and Economic Behavior, Elsevier, vol. 75(2), pages 964-983.
    19. Matthias Fahn & Giorgio Zanarone, 2022. "Transparency in relational contracts," Strategic Management Journal, Wiley Blackwell, vol. 43(5), pages 1046-1071, May.
    20. Goldlücke, Susanne & Kranz, Sebastian, 2012. "Infinitely repeated games with public monitoring and monetary transfers," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1191-1221.

    More about this item

    Keywords

    Relational incentive contracts; Shocks; Principal types; Agent types;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:92:y:2015:i:c:p:122-137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.