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Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities

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  • Wagner, Alexander F

Abstract

An agent can choose to bear personal costs to the principal's benefit. In return, the principal offers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. The novel feature of the analysis is that the agent's productivity inside the relationship is correlated with productivity outside. The paper derives the implications of this arguably realistic assumption for the feasibility of relational contracts and for agent selection by principals. It shows, for example, that optimal agent productivity is often non-monotonic in the importance, to the principal, of ensuring agent reliability. Applications of this framework in labor, management, and politics help organize some stylized facts.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8378.

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Date of creation: May 2011
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Handle: RePEc:cpr:ceprdp:8378

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Keywords: Relational contracts; Repeated games;

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  1. Glazer, A., 1999. "Allies as Rivals: Internal and External Rent Seeking," Papers 99-00-10, California Irvine - School of Social Sciences.
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  6. Georgy Egorov & Konstantin Sonin, 2005. "Dictators and Their Viziers: Agency Problems in Dictatorships," Economics Working Papers 0053, Institute for Advanced Study, School of Social Science.
  7. Wagner, Alexander F., 2011. "Board independence and competence," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 71-93, January.
  8. Laing, D., 1990. "Involuntary Layoffs in a Model with Asymmetry Information Concerning Worker Ability," Papers 12-90-4, Pennsylvania State - Department of Economics.
  9. Cicala, Steve & Fryer, Roland G. & Spenkuch, Jörg L., 2011. "A Roy Model of Social Interactions," MPRA Paper 29150, University Library of Munich, Germany.
  10. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  11. Munasinghe, Lalith & Sigman, Karl, 2004. "A hobo syndrome? Mobility, wages, and job turnover," Labour Economics, Elsevier, vol. 11(2), pages 191-218, April.
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