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Relational contracts in a persistent environment

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  • Suehyun Kwon

Abstract

This paper studies relational contracts with partially persistent states, where the distribution of the state depends on the previous state. The optimal contracts have properties similar to those of stationary contracts in Levin (Am Econ Rev 93:835–857, 2003 ), but stationary contracts are no longer optimal. This paper characterizes the optimal contracts. Then, the paper considers two types of persistent states and shows that in both cases the joint surplus in the second best increases with the state. A sufficient condition for stationary contracts to be optimal is provided. Copyright Springer-Verlag Berlin Heidelberg 2016

Suggested Citation

  • Suehyun Kwon, 2016. "Relational contracts in a persistent environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 183-205, January.
    • Handle: RePEc:spr:joecth:v:61:y:2016:i:1:p:183-205
    DOI: 10.1007/s00199-015-0891-x
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    References listed on IDEAS

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    Cited by:

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    2. Martimort, David & Semenov, Aggey & Stole, Lars, 2017. "Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection," Economics Letters, Elsevier, vol. 159(C), pages 18-22.
    3. Can Urgun, 2021. "Restless Contracting," Working Papers 2021-88, Princeton University. Economics Department..
    4. Ricard Gil & Myongjin Kim & Giorgio Zanarone, 2022. "Relationships Under Stress: Relational Outsourcing in the U.S. Airline Industry After the 2008 Financial Crisis," Management Science, INFORMS, vol. 68(2), pages 1256-1277, February.

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    More about this item

    Keywords

    Relational contracts; Persistence; Moral hazard ; History-independent contracts; Stationary contracts; C73; D82; D86; L14;
    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
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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