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  3. American Economic Review
  4. October 2013
  5. Managing Conflicts in Relational Contracts

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Managing Conflicts in Relational Contracts

  • Jin Li
  • Niko Matouschek
American Economic Review
vol. 103, no. 6, October 2013
(pp. 2328–51)
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Abstract

A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict. Finally, we show that liquidity constraints limit the manager's ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less.

Citation

Li, Jin, and Niko Matouschek. 2013. "Managing Conflicts in Relational Contracts." American Economic Review, 103 (6): 2328–51. DOI: 10.1257/aer.103.6.2328

Additional Materials

JEL Classification

  • C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
  • D74 Conflict; Conflict Resolution; Alliances
  • D86 Economics of Contract: Theory
  • J33 Compensation Packages; Payment Methods
  • J41 Labor Contracts
  • M12 Personnel Management; Executives; Executive Compensation