Working Paper: CEPR ID: DP8378
Authors: Alexander F. Wagner
Abstract: An agent can choose to forego benefits from side opportunities and to instead provide benefits to the principal. In return, the principal offers rewards. If this exchange is not contractible, typically repeated interaction will be required to sustain it. This model allows the agent's 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.
Keywords: relational contracts; repeated games
JEL Codes: D23; D82; M51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agent competence (D82) | feasibility of reliability (C62) |
| high competence (M54) | costly rewards (J33) |
| costly rewards (J33) | limited feasibility of reliability (D80) |
| competence (D83) | value created through reliability (D46) |
| value created through reliability (D46) | sustainability of relational contracts (L14) |
| value of reliability to principal (C38) | optimal competence of agent (D82) |