Theoretical Foundations of Relational Incentive Contracts
- Author(s): Watson, Joel
- et al.
Published Web Locationhttps://doi.org/10.1146/annurev-economics-090820-110736
This article describes the emerging game-theoretic framework for modeling long-term contractual relationships with moral hazard. The framework combines self-enforcement and external enforcement, accommodating alternative assumptions regarding how actively the parties initially set and renegotiate the terms of their contract. A progression of theoretical components is reviewed, building from the recursive formulation of equilibrium continuation values in repeated games. A principal-agent setting serves as a running example.