Research Details

Abstract

We discuss how trust is optimally maintained when promise-makers are privately informed about the costs of keeping their promises and efficient transfers are not feasible. To this end, we present a simplified version of the model in Li and Matouschek (2013) in which a principal and an agent are in a infinitely repeated relationship. The agent's effort and output are observable but not contractible and the principal is privately informed about the per-dollar cost of paying the agent, which is either one or infinite. We characterize the optimal relational contract, illustrate the methods used in solving games with one-sided asymmetric information and inefficient transfers, and discuss further applications.

Type

Article

Author(s)

Niko Matouschek, Jin Li

Date Published

2023

Citations

Matouschek, Niko, and Jin Li. 2023. Making and Breaking Promises When Their Costs Are Private Information. Journal of Institutional and Theoretical Economics.(179 (3-4)): 639-660.