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Relational contracts, limited liability, and employment dynamics

Fong, Yuk-fai and Li, Jin (2017) Relational contracts, limited liability, and employment dynamics. Journal of Economic Theory, 169. pp. 270-293. ISSN 1095-7235

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Identification Number: 10.1016/j.jet.2017.02.006

Abstract

This paper studies a relational contracting model in which the agent is protected by a limited liability constraint. The agent's effort is his private information and affects output stochastically. We characterize the optimal relational contract and compare the dynamics of the relationship with that under the optimal long-term contract. Under the optimal relational contract, the relationship is less likely to survive, and the surviving relationship is less efficient. In addition, relationships always converge to a steady state under the optimal long-term contract, but they can cycle among different phases under the optimal relational contract.

Item Type: Article
Official URL: https://www.journals.elsevier.com/journal-of-econo...
Additional Information: © 2017 Elsevier
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Sets: Departments > Management
Date Deposited: 10 Oct 2017 16:27
Last Modified: 20 Jun 2020 02:33
URI: http://eprints.lse.ac.uk/id/eprint/84563

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