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Rulebooks in Relational Contracts

Author

Listed:
  • Li, Jin

    (Business and Economics, The University of Hong Kong, K.K.)

  • Mukherjee, Arijit

    (Michigan State University, Department of Economics)

  • Vasconcelos, Luis

    (Department of Economics, University of Essex)

Abstract

Firms can accrue large benefits by fostering worker initiative, but standardized work rules are still widely used. We present a model of relational incentives where the use of rules fluctuates over time as the firm faces shocks to its credibility. Worker initiative in adapting to local information can ensure production efficiency but also requires strong incentives. As shocks weaken relational incentives, the firm may adopt rules that yield satisfactory (though suboptimal) performance. Rules help the relationship survive the shocks, but the relationship becomes less efficient in the future. While the relationship may recover, its ability to weather future shocks deteriorates.

Suggested Citation

  • Li, Jin & Mukherjee, Arijit & Vasconcelos, Luis, 2019. "Rulebooks in Relational Contracts," Working Papers 2019-7, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2019_007
    as

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    File URL: http://econ.msu.edu/repec/wp/2019%2005%2011%20Rulebook%20QJE%20draft.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Relational contracts; standardization; rules; employee initiative;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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