Relational Contracts and the Value of Relationships

  title={Relational Contracts and the Value of Relationships},
  author={Marina Halac},
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 promised payments, while if the uninformed agent has the bargaining power, the principal wants to… CONTINUE READING