Template-Type: ReDIF-Paper 1.0
Title: Relational Enforcement
Author-Name: Peter Wagner
Author-Email: peter.wagner@york.ac.uk
Author-Name: Jan Knoepfle
Author-Email: jan.knoepfle@aalto.fi

Classification-JEL: C73, D82, D83, D86, L51
Keywords: Relational contracts, compliance, costly inspections, commitment, randomization

Abstract: This paper studies a principal who incentivizes an agent to achieve and maintain compliance and
voluntarily disclose incidences of non-compliance. Compliance is modeled as a persistent binary
process that jumps at random times arriving at a rate that depends on the agent's efforts. The state
of compliance is verifiable by the principal only at isolated instances through costly inspections.
We show that in principal-optimal equilibria, the principal attains maximum compliance by using
deterministic inspections. The optimal equilibrium features periodic inspection cycles which are
suspended during periods of self-reported non-compliance, in which the agent is fined. We explain
how commitment to random inspections benefits the principal by relaxing the agent's incentive-
compatibility constraints, and we discuss possible ways for the principal to overcome her commitment
problem through third-party involvement.

Note: 
Length: 51
Creation-Date: 2021-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp295
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2021_295