Template-Type: ReDIF-Paper 1.0
Title: Relational Contracts: Public Versus Private Savings
Author-Name: Francesc Dilmé
Author-Email:
Author-Name: Daniel Garrett
Author-Email:

Classification-JEL: D82
Keywords: relational contracts, consumption smoothing preferences, private savings
Abstract: We study relational contracting with an agent who has consumption-smoothing preferences as well as the ability to save to defer consumption (or to borrow). We compare
principal-optimal relational contracts in two settings. The first where the agent’s consumption and savings decisions are private, and the second where these decisions are
publicly observed. In the first case, the agent smooths his consumption over time, the
agent’s effort and payments eventually decrease over time, and the balances on his savings account eventually increase. In essence, the relationship eventually deteriorates with
time. In the second case, the relational contract can specify the level of consumption by
the agent in each period. The optimal contract calls for the agent to consume earlier
than he would like, consumption and balances on the account fall over time, and effort
and payments to the agent increase. Our results suggest a possible explanation for low
savings rates in certain industries where incentive pay plays an important role.

Note: 
Length: 74
Creation-Date: 2019-10
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp132
Handle: RePEc:bon:boncrc:CRCTR224_2019_132