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Investing in a relationship

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  • Marina Halac

Abstract

type="main"> A principal can make an investment anticipating a repeated relationship with an agent, but the agent may appropriate the returns through ex post bargaining. I study how this holdup problem and efficiency depend on the contracting environment. When investment returns are observable, informal contracts ex post can be more efficient than formal contracts, as they induce higher investment ex ante: the principal invests not only to generate direct returns, but also to improve relational incentives. Unobservability of returns increases the principal's ability to appropriate the returns but reduces her ability to improve incentives. The optimal information structure depends on bargaining power.

Suggested Citation

  • Marina Halac, 2015. "Investing in a relationship," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 165-185, March.
  • Handle: RePEc:bla:randje:v:46:y:2015:i:1:p:165-185
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12080
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    Cited by:

    1. Benoît, Jean-Pierre & Galbiati, Roberto & Henry, Emeric, 2017. "Investing to cooperate: Theory and experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 1-17.
    2. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
    3. Florian Englmaier & Matthias Fahn, 2015. "Size Matters - "Over"investments in a Relational Contracting Setting," CESifo Working Paper Series 5154, CESifo Group Munich.
    4. Maija Halonen-Akatwijuka & Evagelos Pafilis, 2018. "Common Ownership of Public Goods," Bristol Economics Discussion Papers 18/700, Department of Economics, University of Bristol, UK.
    5. Bård Harstad & Francesco Lancia & Alessia Russo, 2015. "Compliance Technology and Self-Enforcing Agreements," CESifo Working Paper Series 5562, CESifo Group Munich.
    6. Palermo, Alberto, 2016. "Hold-up in vertical hierarchies with adverse selection," Economics Letters, Elsevier, vol. 148(C), pages 91-95.
    7. Englmaier, Florian & Fahn, Matthias, 2014. "Size Matters - “Over†investments in a Relational Contracting Setting," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 506, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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