Implicit contracting with a (potentially) reliable agent

Implicit contracts—informal agreements tied to observable, but non-verifiable information—play an important role in economic life. In this paper, we model such contracting in a two-period model with an agent that may be reliable, i.e., that always sticks to a promise he has previously made. We deriv...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 2008-07, Vol.94 (2), p.177-189
Main Author: Gürtler, Oliver
Format: Article
Language:English
Subjects:
Business orders
Collusion
Contract incentives
Contracts
Costs
Discounting
Economic equilibrium models
Economic life
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Equilibrium
Game Theory
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Monopolies
Present value
Principal-agent theory
Public Finance
Social and Behav. Sciences
Social welfare
Studies
Surplus
Two period model
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Summary:Implicit contracts—informal agreements tied to observable, but non-verifiable information—play an important role in economic life. In this paper, we model such contracting in a two-period model with an agent that may be reliable, i.e., that always sticks to a promise he has previously made. We derive three main results: First, we show that a decrease in the discount factor may lead to a switch from a pooling equilibrium, where unreliable types mimic the reliable ones, to a separating one. Second, we find that a pooling equilibrium may yield a relatively lower surplus, because it puts a downward pressure on the effort that can be implemented. Combining both these results, we finally show that a decrease in the discount factor may be welfare-enhancing.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-008-0023-1