Theoretical Economics, Volume 19, Number 3 (July 2024)

Theoretical Economics 19 (2024), 1027–1055


Robust relational contracts with subjective performance evaluation

V. Bhaskar, Wojciech Olszewski, Thomas Wiseman

Abstract


We study a repeated principal-agent model with transferable utility, where the principal's evaluation of the agent's performance is subjective. Our focus is on equilibria which are robust to the addition of small privately observed shocks to the payoffs. Existing constructions of positive-effort equilibria are not robust to such payoff shocks. Allowing for simultaneous cheap-talk announcements makes some effort sustainable in a robust equilibrium, and payoffs can be arbitrarily close to fully efficient ones if players are sufficiently patient. In contrast to the existing literature, our near-efficient equilibria exhibit realistic features: the bonus size is reasonable, the threshold for being paid a bonus is non-trivial, and the base wage need not be negative.

Keywords: Private monitoring, repeated games, relational contracts

JEL classification: C73, D86

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