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Relational Contracts and Competitive Screening

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  • Calzolari, Giacomo
  • Spagnolo, Giancarlo

Abstract

We study the tension between competitive screening and contract enforcement where a principal trades repeatedly with one among several agents, moral hazard and adverse selection coexist, and non-contractible dimensions are governed by relational contracting. We simultaneously characterize optimal relational contracts and competitive screening policies which are interdependent. When non-contractible dimensions are important, the principal optimally restricts competitive screening to a subset of 'loyal' agents, giving up performance bonuses and, when such dimensions are crucial, negotiates an indefinitely renewable contract with one agent. To enhance enforcement, explicit contract duration is also reduced. However, these policies facilitate collusion among agents, which induces an additional trade-off between reputational forces and collusion. When non-contractible dimensions are very important this last trade-off may disappear, as collusion allows more efficient enforcement of better performance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7434.

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Date of creation: Aug 2009
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Handle: RePEc:cpr:ceprdp:7434

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Keywords: auctions; collusion; contract duration; efficiency wages; implicit and incomplete contracts; Limited enforcement; Loyalty; Multi-tasking; Negotiation; Non-contractible quality; Performance bonus; Procurement; Relational contracts; Reputation; Screening;

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Citations

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Cited by:
  1. James M. Malcomson, 2012. "Relational Incentive Contracts
    [The Handbook of Organizational Economics]
    ," Introductory Chapters, Princeton University Press.
  2. Iossa, Elisabetta & Rey, Patrick, 2013. "Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9571, C.E.P.R. Discussion Papers.
  3. Spagnolo, Giancarlo, 2012. "Reputation, Competition, and Entry in Procurement," SITE Working Paper Series 14, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  4. Felli, Leonardo & Koenen, Johannes & Stahl, Konrad O, 2011. "Competition and Trust: Evidence from German Car Manufacturers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8265, C.E.P.R. Discussion Papers.
  5. Butler, Jeffrey V. & Carbone, Enrica & Conzo, Pierluigi & Spagnolo, Giancarlo, 2013. "Reputation and Entry," Konkurrensverket Working Paper Series in Law and Economics 2013:3, Konkurrensverket (Swedish Competition Authority).
  6. Cesare Dosi & Michele Moretto, 2012. "Procurement with Unenforceable Contract Time and the Law of Liquidated Damages," Working Papers 2012.45, Fondazione Eni Enrico Mattei.
  7. Spagnolo, Giancarlo & Bergman, Mats A. & Lundberg, Sofia, 2012. "Privatization and Quality: Evidence from Elderly Care in Sweden," SITE Working Paper Series 19, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  8. Jeanette Brosig & Timo Heinrich, 2011. "Reputation and Mechanism Choice in Procurement Auctions – An Experiment," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0254, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  9. Simon Board, 2011. "Relational Contracts and the Value of Loyalty," American Economic Review, American Economic Association, vol. 101(7), pages 3349-67, December.

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