3349 Firms routinely rely on the goodwill of their trading partners. In developed economies, ongoing relationships complement formal contracts in mitigating holdup and facilitating transactions (Stewart Macaulay 1963). In developing economies, where contracts enjoy little legal protection, long-term relationships are even more critical for trade (John McMillan and Christopher Woodruff 1999). Th...

This paper investigates the robustness of the “two-tiered labor market” experimental results of Brown, Falk and Fehr (2004) by subjecting relationships to stochastic interruptions. Using two different subject pools, we first replicate the basic pattern of high quality private contracting and low quality public contracting. We then study the impact of exogenous random ‘downturns’ in which firms ...

This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either abov...

Contract-based design is emerging as a unifying compositional paradigm for the specification, design and verification of large-scale complex systems. Yet, different contract frameworks are currently available, without a clear understanding of the relations between them. In this paper, we investigate the relation between interface theories (specifically, relational interfaces) and assume-guarant...

This paper extends Levin’s (2003) relational contract model by having not only the agent’s cost of effort (agent’s type), but also the value of that effort to the principal (principal’s type) subject to i.i.d. shocks. When optimal effort is fully pooled across agent types for multiple principal types, it is also pooled across those principal types. When optimal effort separates some agent types...

Strategic alliances range from short-term cooperative projects, through long-term partnerships and joint ventures, to transactions that permanently restructure firm boundaries and asset ownership. The economics literature lacks a framework for analyzing this plethora of governance structures. In this paper, we draw on detailed discussions with practitioners to present a rich model of feasible g...

This paper characterizes the distribution of jobs in a relational contracting model where both employed and unemployed workers compete for jobs. In equilibrium, identical firms offer a continuous distribution of contracts, with some firms offering high-wage, high-productivity contracts and others offering low-wage, low-productivity contracts. An increase in on-the-job-search affects equilibrium...

This paper studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I consider a principal-agent setting where the principal has persistent private information about her outside option. I show that if the principal has the bargaining power, she wants to understate her outside option to provide strong incentives and then renege on...

This paper explores the consequences of using supplier trade credit within a vertical relational contract. The downstream firm operates in an environment where shocks may make it unable to repay. The shocks are unobservable to the supplier, which creates an asymmetric information problem. Trade credit limits the supplier’s possibilities to punish the downstream firm and termination is used in e...