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15.11. BGSE Micro Workshop: Nicolas Klein

BGSE Micro Workshop with Nicolas Klein (University of Montreal)

Event details
What
  • BGSE Workshop
When Nov 15, 2017
from 12:00 to 13:00
Where room 0.017
Contact Name Stephan Lauermann
Contact Email
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Topic

Relational Contracts with Private Information on the Future Value of the Relationship: The Upside of Implicit Downsizing Costs 

 

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.
 


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