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American Economic Review: Vol. 102 No. 2 (April 2012)

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Relational Contracts and the Value of Relationships

Article Citation

Halac, Marina. 2012. "Relational Contracts and the Value of Relationships." American Economic Review, 102(2): 750-79.

DOI: 10.1257/aer.102.2.750

Abstract

This article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I consider a principal-agent setting where the principal has persistent private information about her outside option. I show that if the principal has the bargaining power, she wants to understate her outside option to provide strong incentives and then renege on promised payments, while if the uninformed agent has the bargaining power, the principal wants to overstate her outside option to capture more surplus. I characterize how information is revealed, how the relationship evolves, and how this depends on bargaining power. (JEL C78, D82, D83, D86)

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Authors

Halac, Marina (Columbia U)

JEL Classifications

C78: Bargaining Theory; Matching Theory
D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
D86: Economics of Contract: Theory


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