American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Relational Contracts and the Value of Loyalty
American Economic Review
vol. 101,
no. 7, December 2011
(pp. 3349–67)
Abstract
This paper characterizes the optimal contract for a principal who repeatedly chooses among N potential agents under the threat of holdup. Over time, the principal would like to trade with different agents; however, the possibility of ex-post opportunism allows agents to collect rents and creates a fixed cost of initiating new relationships. In the optimal contract, the principal divides agents into "insiders" with whom she trades efficiently, and "outsiders" whom she is biased against. The optimal contract is self-enforcing if the principal is sufficiently patient and can be implemented by an "employment contract" that is robust to asymmetric information. (JEL: C73, D82, D83, D86)Citation
Board, Simon. 2011. "Relational Contracts and the Value of Loyalty." American Economic Review, 101 (7): 3349–67. DOI: 10.1257/aer.101.7.3349JEL Classification
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D82 Asymmetric and Private Information
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- D86 Economics of Contract: Theory