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Relational Contracts with Private Information On the Future Value of the Relationship

Author

Listed:
  • Fahn, Matthias

    (JKU Linz)

  • Klein, Nicolas

    (University of Montreal)

Abstract

We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.

Suggested Citation

  • Fahn, Matthias & Klein, Nicolas, 2018. "Relational Contracts with Private Information On the Future Value of the Relationship," Rationality and Competition Discussion Paper Series 106, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:106
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    relational contracts; sequential inefficiencies; downsizing;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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