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Making and Breaking Promises when their Costs Are Private Information

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  • Jin Li
  • Niko Matouschek

Abstract

We discuss how to maintain trust when promise-makers are privately informed about the costs of keeping their promises and efficient transfers are not feasible. To this end, we present a simplified version of the model in Li and Matouschek (2013) in which a principal and an agent are in an infinitely repeated relationship. The agent's effort and output are observable but not contractible and the principal is privately informed about the cost of paying the agent. We characterize the optimal relational contract, illustrate the methods used in solving games with one-sided asymmetric information and inefficient transfers, and discuss further applications.

Suggested Citation

  • Jin Li & Niko Matouschek, 2023. "Making and Breaking Promises when their Costs Are Private Information," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 639-660.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2023-0046
    DOI: 10.1628/jite-2023-0046
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    More about this item

    Keywords

    relational contracts; imperfect monitoring; relationalcontracts; imperfectmonitoring;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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