Working Paper: CEPR ID: DP12645
Authors: Marta Troya Martinez; Liam Wren-Lewis
Abstract: Relational contracts are typically modeled as being between a principal and an agent, such as a firm owner and a supplier. Yet, in a variety oforganizations, relationships are overseen by an intermediary such as a manager. Such arrangements open the door for collusion between the manager and the agent. This paper develops a theory of such managed relational contracts. We show that managed relational contracts differ from principal-agent ones in important ways. First, kickbacks from the agent can help solve the manager's commitment problem. When commitment is difficult, this can result in higher agent effort than the principal could incentivize directly. Second, making relationships more valuable enables more collusion and hence can reduce effort. We also analyze the principal's delegation problem and show that she may or may not benefit from entrusting the relationship to a manager.
Keywords: relational contracts; delegation; corruption
JEL Codes: D73; D86; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Kickbacks from the agent (L85) | Higher agent effort (L85) |
| Making relationships more valuable (L14) | Enable more collusion (K21) |
| Enable more collusion (K21) | Reduce effort (Y60) |
| Delegating to a manager (M54) | Principal may or may not benefit (G29) |