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Arm's Length Relationships

Arm's Length Relationships Abstract We show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats. Hence it will weaken incentives and can therefore be counterproductive. This phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible. Applications to the theory of the firm are briefly explored. * I thank Lawrence Ausubel, Patrick Bolton, Jean-Jacques Laffont, James Malcomson, Michael Riordan, Klaus Schmidt, Paul Seabright, and Jean Tirole for useful comments and discussions. This content is only available as a PDF. © 1995 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Quarterly Journal of Economics Oxford University Press

Arm's Length Relationships

The Quarterly Journal of Economics , Volume 110 (2) – May 1, 1995

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Publisher
Oxford University Press
Copyright
© 1995 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
ISSN
0033-5533
eISSN
1531-4650
DOI
10.2307/2118440
Publisher site
See Article on Publisher Site

Abstract

Abstract We show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats. Hence it will weaken incentives and can therefore be counterproductive. This phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible. Applications to the theory of the firm are briefly explored. * I thank Lawrence Ausubel, Patrick Bolton, Jean-Jacques Laffont, James Malcomson, Michael Riordan, Klaus Schmidt, Paul Seabright, and Jean Tirole for useful comments and discussions. This content is only available as a PDF. © 1995 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Journal

The Quarterly Journal of EconomicsOxford University Press

Published: May 1, 1995

There are no references for this article.