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Theoretical Foundations of Relational Incentive Contracts

Authors
  • Watson, Joel
Type
Published Article
Journal
Annual Review of Economics
Publisher
Annual Reviews
Publication Date
Aug 05, 2021
Volume
13
Pages
631–659
Identifiers
DOI: 10.1146/annurev-economics-090820-110736
Source
Annual Reviews
Keywords
License
Yellow

Abstract

This article describes the emerging game-theoretic framework for modeling long-term contractual relationships with moral hazard. The framework combines self-enforcement and external enforcement, accommodating alternative assumptions regarding how actively the parties initially set and renegotiate the terms of their contract. A progression of theoretical components is reviewed, building from the recursive formulation of equilibrium continuation values in repeated games. A principal-agent setting serves as a running example.

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