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Learning in Relational Contracts

Author

Listed:
  • Rumen Kostadinov
  • Aditya Kuvalekar

Abstract

We study relational contracts between a firm and a worker with mutual uncertainty about match quality. The worker's actions are publicly observed and generate both output and information about the match quality. We show that the relational contracts may be inefficient. We characterize the inefficiency through a holdup problem on the contemporaneous output. In the frequent action limit, these inefficiencies persist if and only if information degrades at least at the same rate at which impatience vanishes. We characterize optimal relational contracts and show that they involve actions that yield both a lower payoff and less information than another action.

Suggested Citation

  • Rumen Kostadinov & Aditya Kuvalekar, 2022. "Learning in Relational Contracts," American Economic Journal: Microeconomics, American Economic Association, vol. 14(1), pages 284-329, February.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:1:p:284-329
    DOI: 10.1257/mic.20190203
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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