Learning in Relational Contracts

65 Pages Posted: 29 Aug 2016 Last revised: 26 Jul 2018

See all articles by Rumen Kostadinov

Rumen Kostadinov

McMaster University

Aditya Kuvalekar

Universidad Carlos III de Madrid

Date Written: July 1, 2018

Abstract

We study relational contracts in a firm-worker relationship with mutual uncertainty about match quality. The worker’s actions are publicly observed and generate output, and hence information about the match quality. Despite the absence of private information, uncertainty about match quality creates a holdup problem causing inefficiencies in relational contracts even in the frequent action limit. We characterize the optimal relational contracts and show that they involve actions that yield both a lower payoff and less information than another action. Yet, such actions may be a modest way to learn about the match quality when more efficient actions are not credible.

Keywords: Relational contracts, Learning, Repeated Games

JEL Classification: C73, D21, D23, D83, M55

Suggested Citation

Kostadinov, Rumen and Kuvalekar, Aditya, Learning in Relational Contracts (July 1, 2018). Available at SSRN: https://ssrn.com/abstract=2830928 or http://dx.doi.org/10.2139/ssrn.2830928

Rumen Kostadinov

McMaster University ( email )

Hamilton
Canada

HOME PAGE: http://https://sites.google.com/view/rumen-kostadinov

Aditya Kuvalekar (Contact Author)

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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