Relational Contracts and the Value of Relationships

Halac, Marina

doi:10.1257/aer.102.2.750

Cited by 140 publications

(65 citation statements)

References 29 publications

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“…The evidence presented in our paper also informs a growing theoretical literature analyzing repeated buyer-seller relationships with persistent hidden information, usually specified as principal-agent relations (Levin, 2003;Halac, 2012;Yang, 2013;Li and Matouschek, 2014;Malcomson, 2015). However, there are several differences between this literature and our set-up which aims at testing the pure effect of reduced relational knowledge on the terms of relational contracts.…”

Section: Introductionmentioning

confidence: 56%

“…2 However, there is an important common element: Some types of the privately informed parties have an incentive to misreport. For instance, in Levin (2003), the principal wants to understate profits; in Malcomson (2015), he wants to overstate costs; in Halac (2012) he may have incentives to over-or understate outside options. Thus, the potential for mistrust, which we emphasize, is also present in these models.…”

Section: Introductionmentioning

confidence: 99%

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Cooperation and Mistrust in Relational Contracts

2016

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Work and trade relationships are often governed by relational contracts, in which incentives for cooperative action today stem from the prospective future benefits of the relationship. In this paper, we study how reductions in clarity about the financial consequences of actions, induced by incomplete information about the costs of providing quality, affect relational contracts in buyer-seller relationships. Under incomplete information, payoffs to actions become private information. This can impede the joint understanding of what constitutes cooperative behavior, and may thus inject mistrust into relationships, even if credibility is held constant. Comparing seller-buyer relationships with and without complete information about seller costs in the laboratory, we find that such a lack of clarity has effects on the terms of relational contracts. However, these effects only concern the distribution of rents, and not efficiency.

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Section: Introductionmentioning

confidence: 56%

Section: Introductionmentioning

confidence: 99%

Cooperation and Mistrust in Relational Contracts

2016

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“…Our analysis below unveils to what extent stationarity should be taken with a word of caution when types are persistent. 15 We follow here Abreu (1988) and the literature on relational contracts (Levin 2003, Halac 2012 in specifying that the worst equilibrium is played following a breach.…”

Section: Costly Enforcement: Setting Up the Stagementioning

confidence: 99%

“…Other papers addressing how types persistence affects relational contracts include Horner (2002), Fong and Li (2010), Halac (2012), and Malcomson (2012b). Those authors are interested in how private information of the supplier diffuses over time in environments with no commitment.…”

Section: Literature Reviewmentioning

confidence: 99%

A Theory of Contracts with Limited Enforcement

Martimort

Semenov

Stole

2016

Review of Economic Studies

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Abstract. We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a longterm contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with backloaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. The public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances.

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“…11 In addition to the work cited in footnote 5, see Golosov and Tsyvinski (2006), Halac (2012), Kapicka (2013), Strulovici (2011), andWilliams (2011).…”

Section: The Modelmentioning

confidence: 99%

Fiscal Rules and Discretion under Persistent Shocks

Halac¹,

Yared²

2012

Self Cite

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This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present bias toward public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under independent and identically distributed shocks, we show that the ex ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run.

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Relational Contracts and the Value of Relationships

Cited by 140 publications

References 29 publications

Cooperation and Mistrust in Relational Contracts

Cooperation and Mistrust in Relational Contracts

A Theory of Contracts with Limited Enforcement

Fiscal Rules and Discretion under Persistent Shocks

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