Working Paper: CEPR ID: DP7434
Authors: Giacomo Calzolari; Giancarlo Spagnolo
Abstract: We study the tension between competitive screening and contract enforcement where a principal trades repeatedly with one among several agents, moral hazard and adverse selection coexist, and non-contractible dimensions are governed by relational contracting. We simultaneously characterize optimal relational contracts and competitive screening policies which are interdependent. When non-contractible dimensions are important, the principal optimally restricts competitive screening to a subset of 'loyal' agents, giving up performance bonuses and, when such dimensions are crucial, negotiates an indefinitely renewable contract with one agent. To enhance enforcement, explicit contract duration is also reduced. However, these policies facilitate collusion among agents, which induces an additional trade-off between reputational forces and collusion. When non-contractible dimensions are very important this last trade-off may disappear, as collusion allows more efficient enforcement of better performance.
Keywords: auctions; collusion; contract duration; efficiency wages; implicit and incomplete contracts; limited enforcement; loyalty; multitasking; negotiation; noncontractible quality; performance bonus; procurement; relational contracts; reputation; screening
JEL Codes: C73; D86; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited competition (L13) | improved enforcement (K40) |
| nature of the contract (L14) | enforcement outcomes (K40) |
| collusion among agents (L12) | efficient enforcement of performance (K40) |
| collusion among agents (L12) | reduced screening (C24) |
| noncontractible dimensions (D86) | influence on collusion (D74) |