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The optimal disclosure policy when firms offer implicit contracts

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  • Arijit Mukherjee

Abstract

The observability of history is crucial for the sustenance of implicit (or relational) contracts. When a firm hires a sequence of short‐lived workers, turnover adversely affects the observability of history—the old worker may leave the firm before communicating the history to the young. However, turnover can also enhance profits if matching gains can be extracted up front. Disclosure of the workers' productivity information affects turnover by mitigating adverse selection. Thus, the optimal disclosure policy trades off matching efficiency with the sustainability of implicit contracts. I show that (i) opaqueness can be optimal only for firms with moderate reputation concerns, and (ii) an opaque firm's profit may decrease with its reputation concern.

Suggested Citation

  • Arijit Mukherjee, 2010. "The optimal disclosure policy when firms offer implicit contracts," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 549-573, September.
    • Handle: RePEc:bla:randje:v:41:y:2010:i:3:p:549-573
    DOI: 10.1111/j.1756-2171.2010.00111.x
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    References listed on IDEAS

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    Cited by:

    1. Nicola Meccheri & Luciano Fanti, 2014. "Informal incentive labour contracts and product market competition," Journal of Economics, Springer, vol. 111(2), pages 131-149, March.
    2. Bryson, Alex & Buraimo, Babatunde & Simmons, Rob, 2011. "Do salaries improve worker performance?," Labour Economics, Elsevier, vol. 18(4), pages 424-433, August.
    3. Günter Strobl & Edward D. Van Wesep, 2013. "Publicizing Performance," Management Science, INFORMS, vol. 59(4), pages 918-932, April.

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