We develop a model of nonstationary relational contracts in order to study internal wage dynamics. Workers are heterogeneous and each worker’s ability is both private information and fixed for all time. Learning therefore occurs within employment relationships. The inferences, however, are confounded by moral hazard: the distribution of output is determined by both the worker’s type and by his ...

This paper explores the consequences of using supplier trade credit within a vertical relational contract. The downstream firm operates in an environment where shocks may make it unable to repay. The shocks are unobservable to the supplier, which creates an asymmetric information problem. Trade credit limits the supplier’s possibilities to punish the downstream firm and termination is used in e...

This paper studies manufacturer incentives to invest in the improvement of reliability and security of a software system when (i) reliability and security failures are caused by the same errors in the development of the software components and (ii) naive users find it too costly to distinguish between these two classes of system failures. We trace the effects of these informational imperfection...

In this paper we analyze how a Technology Transfer Office (TTO) developing a reputation in the sale of university research may affect a scientist’s willingness to disclose ideas to the university. The TTO receives projects from academic scientists each period and then must decide whether to check the quality of each project. Checking the quality of projects and only licensing high valued projec...

We examine how trust is sustained in large societies with random matching, when the player to be trusted may default voluntarily or involuntarily. In order to incentivize trustworthiness, defaulters should be punished through temporarily exclusion.The difficulty is that trusting defaulters who are the verge of rehabilitation is profitable. With perfect bounded information, defaulter exclusion u...

This paper offers a tractable and fully rational model to study the economics of reputation in a dynamic market with limited record-keeping, i.e., a market in which new entrants observe only the last few periods of play of the long-run player instead of the full history of the market. We show that trust is gradually granted to the opportunistic longrun player despite the fact that his type is p...

We study the optimal incentive schemes for multistage projects. Staged financing, pervasive in both venture capital and research funding, arises as a feature of the optimal contract. The nature of progress plays an important role. When progress is tangible, incentives are provided through a series of deadlines and a reward scheme that decreases over time. Early progress in one stage gives the a...

Delegation of Authority as an Optimal (In)complete Contract The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an...

This paper investigates under which circumstances negotiating simultaneously over multiple issues or assets helps reduce inefficiencies due to the presence of asymmetric information. We find that a simultaneous negotiation over multiple assets that are substitutes reduces inefficiencies. The effect is stronger if goods are heterogeneous, and in this case the inefficiency can be eliminated altog...

This paper analyzes the e ect of a possible takeover on information ows and on the terms of trade in business relationships. We consider a longterm relationship between a rm and a privately informed stakeholder, say a buyer. In our model, takeovers both increase the surplus from trade and enable the rm to extract a potentially higher share of the surplus from the buyer. The possibility of a tak...