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Relational Incentive Contracts with Persistent Private Information

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  • James Malcomson

Abstract

This paper investigates relational incentive contracts with a continuum of privately observedagent types that are persistent over time. For a sufficiently productive relationship,a pooling contract exists in which all agent types continuing the relationshipchoose the same action. Necessary and sufficient conditions are given for some separationto be feasible; the parties can then do better than with full pooling. When futureactions are optimal, however, separation of all types is not possible; the finest separationachievable is into partitions each containing a non-degenerate interval of types.Separation always involves lower output initially than after separation has occurred.

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  • James Malcomson, 2012. "Relational Incentive Contracts with Persistent Private Information," Economics Series Working Papers 633, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:633
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    References listed on IDEAS

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    Cited by:

    1. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    2. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 816-852.
    3. Lang, Matthias, 2019. "Communicating subjective evaluations," Journal of Economic Theory, Elsevier, vol. 179(C), pages 163-199.
    4. Daniel Barron & Jin Li & Michał Zator, 2022. "Morale and Debt Dynamics," Management Science, INFORMS, vol. 68(6), pages 4496-4516, June.
    5. Bhaskar, V. & Mailath, George J., 2019. "The curse of long horizons," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 74-89.
    6. Hua, Xiameng & Watson, Joel, 2022. "Starting small in project choice: A discrete-time setting with a continuum of types," Journal of Economic Theory, Elsevier, vol. 204(C).
    7. Deb, Rahul & Mitchell, Matthew & Pai, Mallesh M., 2022. "(Bad) reputation in relational contracting," Theoretical Economics, Econometric Society, vol. 17(2), May.
    8. Matthias Fahn & Nicolas Klein, 2019. "Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 33-58, November.
    9. Sandip Mitra & Dilip Mookherjee & Maximo Torero & Sujata Visaria, 2018. "Asymmetric Information and Middleman Margins: An Experiment with Indian Potato Farmers," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 1-13, March.
    10. Zhuo Wenjun, 2023. "Circulation Expectations, Farmer Trust, and Farmers’ Contract Choice Behavior," Land, MDPI, vol. 12(8), pages 1-15, August.
    11. Ekmekci, Mehmet & Maestri, Lucas, 2019. "Reputation and screening in a noisy environment with irreversible actions," MPRA Paper 100885, University Library of Munich, Germany.
    12. Macchiavello, Rocco & Morjaria, Ameet, 2022. "Empirical approaches to trust and relational contracts," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    13. Bergman, Mats A. & Johansson, Per & Lundberg, Sofia & Spagnolo, Giancarlo, 2016. "Privatization and quality: Evidence from elderly care in Sweden," Journal of Health Economics, Elsevier, vol. 49(C), pages 109-119.
    14. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    15. De Chiara, Alessandro, 2020. "Precontractual investment and modes of procurement," European Economic Review, Elsevier, vol. 124(C).
    16. Jean‐Marc Bourgeon & Pierre Picard, 2020. "Insurance law and incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1253-1286, December.
    17. Rodrigo Carril & Andres Gonzalez-Lira & Michael S. Walker, 2022. "Competition under Incomplete Contracts and the Design of Procurement Policies," Working Papers 1327, Barcelona School of Economics.
    18. Johannes Abeler & David Huffman & Collin Raymond & David B. Huffman, 2023. "Incentive Complexity, Bounded Rationality and Effort Provision," CESifo Working Paper Series 10541, CESifo.
    19. Can Urgun, 2021. "Restless Contracting," Working Papers 2021-88, Princeton University. Economics Department..
    20. Li, Jin & Mukherjee, Arijit & Vasconcelos, Luis, 2019. "Managing performance evaluation systems: Relational incentives in the presence of learning-by-shirking," Working Papers 2018-12, Michigan State University, Department of Economics.
    21. Abeler, Johannes & Huffman, David B. & Raymond, Collin, 2023. "Incentive Complexity, Bounded Rationality and Effort Provision," IZA Discussion Papers 16284, Institute of Labor Economics (IZA).
    22. Fahn, Matthias & Klein, Nicolas, 2018. "Relational Contracts with Private Information On the Future Value of the Relationship," Rationality and Competition Discussion Paper Series 106, CRC TRR 190 Rationality and Competition.
    23. Davies, Elwyn & Fafchamps, Marcel, 2021. "When no bad deed goes punished: Relational contracting in Ghana and the UK," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 714-737.
    24. Schmutzler, Armin & Holger, Herz & André, Volk, 2014. "Honesty and Relational Contracts," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100363, Verein für Socialpolitik / German Economic Association.
    25. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.

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    More about this item

    Keywords

    Relational incentive contracts; private information; ratchet effect; dynamic enforcement;
    All these keywords.

    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

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