The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents
AbstractWe consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. This allocation rule performs strictly better than any rule that depends only on payoff-relevant information.
CitationAndrews, Isaiah, and Daniel Barron. 2016. "The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents." American Economic Review, 106 (9): 2742-59. DOI: 10.1257/aer.20131082
- D21 Firm Behavior: Theory
- D82 Asymmetric and Private Information; Mechanism Design
- L14 Transactional Relationships; Contracts and Reputation; Networks
- L24 Contracting Out; Joint Ventures; Technology Licensing