Marina Halac

Investing in a Relationship

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Abstract:
A principal can make an investment anticipating a repeated relationship with an agent, but the agent may appropriate the returns through ex post bargaining. I study how this hold-up problem and efficiency depend on the contracting environment. When investment returns are observable, informal contracts ex post can be more efficient than formal contracts, as they induce higher investment ex ante: the principal invests not only to generate direct returns, but also to improve relational incentives. Unobservability of returns increases the principal's ability to appropriate the returns but reduces her ability to improve incentives. The optimal information structure depends on bargaining power

Source: RAND Journal of Economics
Exact Citation:
Halac, Marina. "Investing in a Relationship." RAND Journal of Economics 46, no. 1 (Spring 2015): 165-185.
Volume: 46
Number: 1
Pages: 165-185
Date: Spring 2015