Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/185776 
Year of Publication: 
2018
Series/Report no.: 
Discussion Paper No. 106
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
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.
Subjects: 
relational contracts
sequential inefficiencies
downsizing
JEL: 
C73
D86
Document Type: 
Working Paper

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