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Relational contracts in a persistent environment

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  • Suehyun Kwon

    () (University College London)

Abstract

Abstract This paper studies relational contracts with partially persistent states, where the distribution of the state depends on the previous state. The optimal contracts have properties similar to those of stationary contracts in Levin (Am Econ Rev 93:835–857, 2003), but stationary contracts are no longer optimal. This paper characterizes the optimal contracts. Then, the paper considers two types of persistent states and shows that in both cases the joint surplus in the second best increases with the state. A sufficient condition for stationary contracts to be optimal is provided.

Suggested Citation

  • Suehyun Kwon, 2016. "Relational contracts in a persistent environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 183-205, January.
  • Handle: RePEc:spr:joecth:v:61:y:2016:i:1:d:10.1007_s00199-015-0891-x
    DOI: 10.1007/s00199-015-0891-x
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    References listed on IDEAS

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    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    2. Toshihiko Mukoyama & Ayşegül Şahin, 2005. "Repeated moral hazard with persistence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 831-854, June.
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    6. Sylvain Chassang, 2010. "Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 448-465, March.
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    Cited by:

    1. Martimort, David & Semenov, Aggey & Stole, Lars, 2017. "Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection," Economics Letters, Elsevier, vol. 159(C), pages 18-22.

    More about this item

    Keywords

    Relational contracts; Persistence; Moral hazard; History-independent contracts; Stationary contracts;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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