The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents

Abstract

We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. This allocation rule performs strictly better than any rule that depends only on payoff-relevant information. (JEL D21, D82, L14, L24)

Optimal contracting with private military and security companies

“…This reduces the benefits of delegating the task as the most efficient agent is not always selected, however it increases the principal's commitment in the respective relationship. Similar results have been obtained by Andrews and Barron (2013) and Board (2011), however in different settings.…”

“…Similar results -although in entirely different settings -can be found in Board (2011) andAndrews and Barron (2013).…”

Web and Internet Economics

“…For example, as in Andrews and Barron (2016), the principal may want to prioritize trade with insiders who recently traded (in order to strengthen incentives at the time of trade). This can lead to a complex form for γ, the probability distribution with which a principal selects an agent to trade; indeed, γ can then depend intricately on the history of play, h t .…”

“…A few papers in the relational contracting literature have considered the relationships between a producer and her suppliers. The most closely related among these are [4] and [3]. [4] finds that an organization may prefer to maintain a limited number of strong relationships with suppliers rather than trading with the lowest-cost supplier in each period.…”

“…This is the inspiration for our notion of insiders. [3] show that it can be optimal for an organization to favor suppliers that it has more recently traded with over others. In both these cases, the focus is on the interaction of a single principal (e.g., organization) with several agents (e.g., suppliers).…”