Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171054
Authors: 
Fahn, Matthias
Klein, Nicolas
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6590
Abstract: 
We analyze a relational contracting problem, in which the principal has private information about the future value of the relationship. In order to reduce bonus payments, the principal is tempted to claim that the value of the future relationship is lower than it actually is. To induce truth-telling, the optimal relational contract may introduce distortions after a bad report. For some levels of the discount factor, output is reduced by more than would be sequentially optimal. This distortion is attenuated over time even if prospects remain bad. Our model thus provides an alternative explanation for indirect short-run costs of downsizing.
JEL: 
C73
D86
Document Type: 
Working Paper
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