# Relational Contracts When the Agent' s Productivity Inside the Relationship is Correlated with Outside Opportunities

Wagner, Alexander (2011). Relational Contracts When the Agent' s Productivity Inside the Relationship is Correlated with Outside Opportunities. CEPR Discussion Paper DP8378, University of Zurich.

## Abstract

An agent can choose to forego bene ts from side opportunities and to instead provide bene ts to the principal. In return, the principal o¤ers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. This model allows the agents productivity in contractible and possibly also non-contractible actions inside the relationship to be correlated with productivity in side activities. This arguably realistic assumption yields several novel implications for the feasibility of relational contracts and for agent selection by principals. The analysis reveals, for example, that optimal agent productivity is often non-monotonic in the importance, to the principal, of ensuring agent reliability.

An agent can choose to forego bene ts from side opportunities and to instead provide bene ts to the principal. In return, the principal o¤ers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. This model allows the agents productivity in contractible and possibly also non-contractible actions inside the relationship to be correlated with productivity in side activities. This arguably realistic assumption yields several novel implications for the feasibility of relational contracts and for agent selection by principals. The analysis reveals, for example, that optimal agent productivity is often non-monotonic in the importance, to the principal, of ensuring agent reliability.

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Item Type: Working Paper 03 Faculty of Economics > Department of Banking and Finance 330 Economics English 2011 21 Feb 2014 09:47 05 Apr 2016 17:39 CEPR Discussion Paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846260 merlin-id:4650
Permanent URL: https://doi.org/10.5167/uzh-92613