Abstract
This paper justifies the first-order approach (FOA) to relational contract models. Optimal relational contracts pay a bonus if an agent passes an evaluation, where the cutoff point is independent of signal distribution or the agent’s cost function. Based on this independence, I find a weak FOA-justifying condition, which requires convexity of the underlying distribution-cost structure only at the cutoff point. Prominent examples (e.g., the normal or generalized error distribution with various cost functions) are consistent with this condition, but are inconsistent with existing conditions such as the Mirrlees–Rogerson condition.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
