Putting the Relationship First

Abstract I examine relational contracts and investment using a tractable game of imperfect private monitoring. A principal requires one of several products in each period from a market of agents. If output is not contractible, the principal relies on a small network of agents relative to first-best. These agents “put the relationship first.” By investing to produce many different products that may be required by the principal, they lock themselves into the relationship, thereby increasing effort provision. I extend the model to show that a similar result holds if the principal requires every product in each period, discuss implications of the framework, and argue that agents might have an incentive to resist socially efficient legal reform.