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


Wagner, Alexander F (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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2011
Deposited On:21 Feb 2014 09:47
Last Modified:28 Aug 2017 15:36
Series Name:CEPR Discussion Paper
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846260
Other Identification Number:merlin-id:4650

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