Research Details

Abstract

We consider how a firm's policies constrain its relational contracts. A policy is a sequence of decisions made by a principal; each decision determines how agents' efforts affect their outputs. We consider surplus-maximizing policies in a flexible dynamic moral hazard problem between a principal and several agents with unrestricted vertical transfers and no commitment. If agents cannot coordinate to punish the principal following a deviation, then the principal might optimally implement dynamically inefficient, history-dependent policies to credibly reward high-performing agents. We develop conditions under which such backward-looking policies are surplus-maximizing and illustrate how they influence promotions, hiring, and performance.

Type

Article

Author(s)

Daniel Barron, Michael Powell

Date Published

2019

Citations

Barron, Daniel, and Michael Powell. 2019. Policies in Relational Contracts. American Economic Journal: Microeconomics.(2): 228-249.