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We study relational contracting and renegotiation in environments with external enforcement of long-term contractual arrangements. A long-term contract governs the stage games that the contracting parties will play in the future (depending on verifiable stage-game outcomes) until they renegotiate. In a contractual equilibrium, the parties choose their individual actions rationally, jointly optimize when selecting a contract, and exercise their relative bargaining power. Our main result is that in a wide variety of settings, the optimal contract is semi-stationary, with stationary terms for all future periods but special terms for the current period. In each period the parties renegotiate to this same contract. For example, in a simple principal-agent model with a choice of costly monitoring technology, the optimal contract specifies mild monitoring for the current period but intense monitoring for future periods. Because the parties renegotiate in each new period, intense monitoring arises only off the equilibrium path after a failed renegotiation. (JEL C73, C78, D23, D86)

How should firms provide incentives to a group of workers when performance measures are unverifiable? We provided some answers to this question in our paper “Team Incentives in Relational Employment Contracts” in 2006. Here we reflect upon the contribution of that paper and provide a further analysis of this research question. We propose a more applied theoretical framework and explore stochastic properties of performance variables, including correlations that make one agent’s performance informative about another agent’s effort. In this framework cooperative incentives tend to be preferable when performances are negatively correlated, while competitive incentives tend to prevail under positive correlation. [ABSTRACT FROM AUTHOR]

Reward systems based on balanced scorecards often connect pay to an index, that is, a weighted sum of multiple performance measures. We show that such an index contract may indeed be optimal if performance measures are nonverifiable so that the contracting parties must rely on self‐enforcement. Under commonly invoked assumptions (including normally distributed measurements), we show that the weights in the index reflect a tradeoff between distortion and precision for the measures. The efficiency of the contract improves with higher precision of the index measure, because this strengthens incentives, and correlations between measurements may for this reason be beneficial. There is a caveat, however, because the index contract is not necessarily optimal for very precise measurements, although it is shown to be asymptotically optimal. We also consider hybrid measurements, and show that the principal may want to include verifiable performance measures in the relational index contract in order to improve incentives, and that this has noteworthy implications for the formal contract. [ABSTRACT FROM AUTHOR]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jebo.2003.09.019 Byline: Trond E. Olsen (a), Petter Osmundsen (b) Keywords: Risk management; Construction; Endogenous risk Abstract: In risk management of complex procurement projects in construction, the buyer can affect the level of risk by careful project specification, or shift risk over to the supplier. Each of the alternatives imply costs for the buyer. The major specification cost is the reduction in net present value due to postponing of the project. Risk sharing by the buyer is costly even if the buyer is risk neutral, since lower risk exposure for the contractor implies weaker incentives and higher construction costs. We model this trade-off in a risk sharing model with endogenous risk. Author Affiliation: (a) Department of Finance and Management Science, Norwegian School of Economics and Business Administration, Helleveien 30, 5045 Bergen, Norway (b) Stavanger University College/Institute for Research in Economics and Business Administration, Norway Article History: Received 10 May 2002; Revised 2 June 2003; Accepted 8 September 2003

Two jurisdictions compete to attract shares of the investment budget of a large multinational enterprise, whose investments confer positive spillovers on national firms. The firm has private information about its efficiency and about spillovers. It is shown that the firm may be harmed by tax competition. Relative to a cooperative tax agreement, tax competition may induce excessive investments in the country where the positive spillover effects are lowest. Also, with sufficiently asymmetric spillovers, investments under competition will be excessively spread out, not properly concentrated to the country where spillovers would be largest. Keywords: Tax competition; Spillovers; Externalities; Mobility; Common agency JEL classification: D82; H21; L51

Optimal performance can be achieved by joint responsibility of tasks in a dynamic setting wherein intertemporal commitment is limited. Joint responsibility of tasks generates a weak ratchet effect, thereby, reducing the cost of optimal performance, and at the same time, allowing the principal to impose a uniform, but diverse lower-powered incentives. Such dynamic benefits, in reducing the impact of ratchet effects, make optimal grouping of tasks an effective job design.

An individual owning or controlling large amounts of a country's resources would consume, invest and extract the resources in an efficient manner if the powerful individual also owns a safe savings account available in Swiss banks. The dictator extracts and allocates resources under threat of being removed from power and political instability that leads to nationalization or expropriation results in the dictator's loss of access to the bank account. A dictator faced with possible expropriation tends to consume more than to save.

An analysis of industrial research (R&D) applications in an exhaustible resource market is presented. The analysis assumes that R&D is strategically used and focuses on cases where consuming countries control R&D and a cartel controls resources. Results show that R&D investments for backstop technology development may trigger low price profiles for resources. In addition, unique perfect equilibrium conditions exhibit limit pricing.

A study was conducted on technological adoption in primary health care. Theoretical and empirical analysis were used. Results showed that most technology adopters weretoo late in adopting the technology and this fact was mainly attributed to adopters' unawareness of the technology at the time of proper adoption. Furtherdata also revealed that factors other than profitability drove physicians to adopt new technolgoy.

The Coase conjecture states that if a durable-goods monopolist can make offers to sell arbitrarily frequently, then in equilibrium she will charge the competitive price, and the market will be saturated quickly. This conjecture is shown to be refuted when production of the durable good is subject to learning by doing: For the linear case it is shown that there exist a stationary-strategy perfect equilibrium in which the monopolist charges competitive prices, but the market is saturated slowly. An interesting analogy between bargaining and durable-goods monopoly with learning by doing is also pointed out.

We analyze relational contracts between a principal and a set of risk-neutral agents whose outputs are correlated. When only the agents' aggregate output can be observed, a team incentive scheme is shown to be optimal, where each agent is paid a bonus for aggregate output above a threshold. We show that the efficiency of the team incentive scheme depends on the way in which the team members' outputs are correlated. The reason is that correlation affects the variance of total output and thus, the precision of the team's performance measure. Negatively correlated contributions reduce the variance of total output, and this improves incentives for each team member in the setting that we consider. This also has implications for optimal team size. If the team members' outputs are negatively correlated, more agents in the team can improve efficiency. We then consider the case where individual outputs are observable. A tournament scheme with a threshold is then optimal, where the threshold depends on an agent's relative performance. We show that correlation affects both the efficiency and design of the optimal tournament scheme. This paper was accepted by Shivaram Rajgopal, accounting. [ABSTRACT FROM AUTHOR]

Existing empirical evidence suggests that individual performance pay is more prevalent in human-capital-intensive industries. We introduce a model that can contribute to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer-dependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold up, the lower is the implementable degree of peer-dependent incentives. In a setting with complementary tasks, we show that although team-based incentives are optimal if agents are dispensable, it may be costly, and, in fact, suboptimal, to provide team incentives when the agents become indispensable. [ABSTRACT FROM AUTHOR]

Incentive contracts must typically be based on performance measures that do not exactly match the agents' true contribution to the principals' objectives. Such misalignment may pose difficulties for effective incentive design. We analyze the extent to which implicit dynamic incentives, such as career concerns and ratchet effects, alleviate or aggfravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects in that stronger ratchet effects or greater distortion may increase optimal monetary incentives, and that distortion affects the optimality of different promotion rules. [ABSTRACT FROM AUTHOR]