Cooperation or Collusion? Rents in Relational Contracts for Teams

Abstract

This study analyzes relational contracts for multiple agents where participation constraints matter and agents monitor each other. Our model highlights that providing rents to agents strengthens peer sanction endowed within their ongoing relationship, which may have a positive effect toward promoting productive cooperation or a negative effect toward inducing unproductive collusion. An optimal relational contract may involve both peer sanction strengthened by rent provision and relative performance evaluation. The agent’s payoff may be higher for patient parties adopting joint performance evaluation than for impatient parties adopting relative performance evaluation.