Nicolas Klein (University of Montreal), “Relational Contracts with Private Information: The Upside of Implicit Downsizing Costs.”, Economic Theory Seminar, Toulouse: TSE, December 13, 2016, 11:00–12:30, room MF 323.
We analyze a relational contracting problem, in which the principal has some 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 was 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.