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Agency Contracts with Long-Term Customer Relationships

Listed author(s):
  • Ignatius J. Horstmann

    (University of Toronto)

  • Frank Mathewson

    (University of Toronto)

  • Neil Quigley

    (Victoria University, Wellington)

In certain industries, sales agent contracts include provisions for sales commissions and clawbacks of commissions if clients are not retained. We show that contracts with these features arise in environments having up-front selling costs recouped from ongoing sales; heterogeneous customers; limited agent access to capital markets; and imperfect commitment to long-term contracts. We test the model using information on insurance sales agent contracts from New Zealand prior to and after bank entry into insurance sales. The evidence indicates that banks cream-skimmed customers. We predict that this should reduce the values of sales commissions and clawbacks. The data support this prediction.

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File URL: http://dx.doi.org/10.1086/430287
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 23 (2005)
Issue (Month): 3 (July)
Pages: 589-608

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Handle: RePEc:ucp:jlabec:v:23:y:2005:i:3:p:589-608
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  1. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
  2. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
  3. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
  4. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883.
  5. Regan, Laureen & Tennyson, Sharon, 1996. "Agent Discretion and the Choice of Insurance Marketing System," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 637-666, October.
  6. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
  7. John Kambhu, 1982. "Optimal Product Quality under Asymmetric Information and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 483-492, Autumn.
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