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Relational Contracts and the Value of Loyalty

  • Simon Board

This paper characterizes the optimal contract for a principal who repeatedly chooses among N potential agents under the threat of holdup. Over time, the principal would like to trade with different agents; however, the possibility of ex-post opportunism allows agents to collect rents and creates a fixed cost of initiating new relationships. In the optimal contract, the principal divides agents into "insiders" with whom she trades efficiently, and "outsiders" whom she is biased against. The optimal contract is self-enforcing if the principal is sufficiently patient and can be implemented by an "employment contract" that is robust to asymmetric information. (JEL: C73, D82, D83, D86)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 7 (December)
Pages: 3349-67

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:7:p:3349-67
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  1. repec:oup:restud:v:61:y:1994:i:1:p:81-108 is not listed on IDEAS
  2. Calzolari, Giacomo & Spagnolo, Giancarlo, 2009. "Relational Contracts and Competitive Screening," CEPR Discussion Papers 7434, C.E.P.R. Discussion Papers.
  3. Steve Kelman, 1990. "Procurement and Public Management," Books, American Enterprise Institute, number 53122, April.
  4. Sylvain Chassang, 2010. "Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 448-65, March.
  5. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 637-58, October.
  6. David McAdams, 2011. "Performance and Turnover in a Stochastic Partnership," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 107-42, November.
  7. Sako, Mari, 1996. "Suppliers' Associations in the Japanese Automobile Industry: Collective Action for Technology Diffusion," Cambridge Journal of Economics, Oxford University Press, vol. 20(6), pages 651-71, November.
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