"Relational Contracts and the Value of Relationships"
American Economic Review,
Volume: 102 | Issue: 2 | Pages: 750-779
Publication type: Journal article
Research Archive Topic: Corporate Finance
This article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I consider a principal-agent setting where the principal has persistent private information about her outside option. I show that if the principal has the bargaining power, she wants to understate her outside option to provide strong incentives and then renege on promised payments, while if the uninformed agent has the bargaining power, the principal wants to overstate her outside option to capture more surplus. I characterize how information is revealed, how the relationship evolves, and how this depends on bargaining power.
Copyright © 2012 by the American Economic Association.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.