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  3. American Economic Journal: Microeconomics
  4. May 2019
  5. Policies in Relational Contracts

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Policies in Relational Contracts

  • Daniel Barron
  • Michael Powell
American Economic Journal: Microeconomics
vol. 11, no. 2, May 2019
(pp. 228–49)
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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.

Citation

Barron, Daniel, and Michael Powell. 2019. "Policies in Relational Contracts." American Economic Journal: Microeconomics, 11 (2): 228–49. DOI: 10.1257/mic.20170181

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
  • M51 Personnel Economics: Firm Employment Decisions; Promotions
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