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Relational Contracts and Hierarchy

Author

Listed:
  • Chongwoo Choe

    (Monash University, Department of Economics)

  • Shingo Ishiguro

    (Osaka University, Graduate School of Economics)

Abstract

We study optimal organization design with one principal and two agents, who interact through long-term relational contracts. In centralization, the principal contracts with both agents. In hierarchy, the principal contracts with one agent, who is delegated authority to contract with the other agent. We derive necessary and sufficient conditions for each organizational structure to achieve the first best. Hierarchy outperforms centralization when players are sufficiently patient and business conditions are favorable enough to alleviate agents’ incentive problems. We apply our theory to evaluate the two contrasting models of supplier networks in the automotive industry in Japan and the US.

Suggested Citation

  • Chongwoo Choe & Shingo Ishiguro, 2022. "Relational Contracts and Hierarchy," Monash Economics Working Papers 2022-08, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2022-08
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Relational Contracts; Centralization; Hierarchy; Supplier Networks;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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