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Annual Review of Economics

Volume 13, 2021

Theoretical Foundations of Relational Incentive Contracts

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.

Keyword(s): enforcement, game theory, JEL C6, JEL C7, JEL D7, JEL D86, JEL E20, JEL E30, JEL F5, JEL L14, negotiation, relational contracts
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2021-08-05
2024-04-19
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Theoretical Foundations of Relational Incentive Contracts
Annual Review of Economics 13, 631 (2021); https://doi.org/10.1146/annurev-economics-090820-110736
/content/journals/10.1146/annurev-economics-090820-110736
/content/journals/10.1146/annurev-economics-090820-110736
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