Relational contracts with private information on the future value of the relationship: The upside of implicit downsizing costs
We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.
Year of publication: |
2017
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Authors: | Fahn, Matthias ; Klein, Nicolas Alexandre |
Publisher: |
Linz : Johannes Kepler University of Linz, Department of Economics |
Saved in:
freely available
Series: | Working Paper ; 1714 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 897136705 [GVK] hdl:10419/183252 [Handle] RePEc:jku:econwp:2017_14 [RePEc] |
Source: |
Persistent link: https://www.econbiz.de/10011916759
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