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Relational Enforcement

Author

Listed:
  • Peter Wagner

  • Jan Knoepfle

Abstract

This paper studies a principal who incentivizes an agent to achieve and maintain compliance and voluntarily disclose incidences of non-compliance. Compliance is modeled as a persistent binary process that jumps at random times arriving at a rate that depends on the agent's efforts. The state of compliance is verifiable by the principal only at isolated instances through costly inspections. We show that in principal-optimal equilibria, the principal attains maximum compliance by using deterministic inspections. The optimal equilibrium features periodic inspection cycles which are suspended during periods of self-reported non-compliance, in which the agent is fined. We explain how commitment to random inspections benefits the principal by relaxing the agent's incentive- compatibility constraints, and we discuss possible ways for the principal to overcome her commitment problem through third-party involvement.

Suggested Citation

  • Peter Wagner & Jan Knoepfle, 2021. "Relational Enforcement," CRC TR 224 Discussion Paper Series crctr224_2021_295, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2021_295
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp295
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    Cited by:

    1. Peter Achim & Willy Lefez, 2025. "Surplus Squeeze and Informational Hold-Up," Rationality and Competition Discussion Paper Series 538, CRC TRR 190 Rationality and Competition.
    2. Daniel N Hauser, 2024. "Promoting a reputation for quality," RAND Journal of Economics, RAND Corporation, vol. 55(1), pages 112-139, March.
    3. Peter Achim & Jan Knoepfle, 2025. "The Tension between Trust and Oversight in Long-term Relationships," Papers 2504.02696, arXiv.org.

    More about this item

    Keywords

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    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
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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