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Relational Incentive Contracts

Relational Incentive Contracts Abstract Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Relational Incentive Contracts

American Economic Review , Volume 93 (3) – Jun 1, 2003

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References (116)

Publisher
American Economic Association
Copyright
Copyright © 2003 by the American Economic Association
Subject
Articles
ISSN
0002-8282
DOI
10.1257/000282803322157115
Publisher site
See Article on Publisher Site

Abstract

Abstract Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.

Journal

American Economic ReviewAmerican Economic Association

Published: Jun 1, 2003

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