Managing relational contracts

Abstract : Relational contracts are typically modeled as being between a principal and an agent, such as a firm owner and a supplier. Yet in a variety of organizations relationships are overseen by an inter- mediary such as a manager. Such arrangements open the door for collusion between the manager and the agent. This paper develops a theory of such managed relational contracts. We show that managed relational contracts di_er from principal-agent ones in important ways. First, kickbacks from the agent can help solve the manager's commitment problem. When commitment is di_cult, this can result in higher agent effort than the principal could incen- tivize directly. Second, making relationships more valuable enables more collusion and hence can reduce e_ort. We also analyze the principal's delegation problem and show that she may or may not benefit from entrusting the relationship to a manager.
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Submitted on : Monday, July 15, 2019 - 10:28:13 AM
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Marta Troya-Martinez, Liam Wren-Lewis. Managing relational contracts. 2019. ⟨halshs-01370408v2⟩

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