American Economic Review: Vol. 103 No. 6 (October 2013)


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Managing Conflicts in Relational Contracts

Article Citation

Li, Jin, and Niko Matouschek. 2013. "Managing Conflicts in Relational Contracts." American Economic Review, 103(6): 2328-51.

DOI: 10.1257/aer.103.6.2328


A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict. Finally, we show that liquidity constraints limit the manager's ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less.

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Li, Jin (Northwestern U)
Matouschek, Niko (Northwestern U)

JEL Classifications

C73: Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
D74: Conflict; Conflict Resolution; Alliances
D86: Economics of Contract: Theory
J33: Compensation Packages; Payment Methods
J41: Labor Contracts
M12: Personnel Management; Executives; Executive Compensation

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