Robust Relational Contracts when Performance Evaluation is Subjective
Venkataraman Bhaskar*, Thomas Wiseman
Date: 2019-05-04 12:00 pm – 12:30 pm
Last modified: 2019-04-14
Abstract
We study a repeated principal agent model with transferable utility, where the principal's evaluation of the agent's performance is subjective. Consequently, monitoring is noisy and private. We focus on purifiable equilibria, that are robust to small iid payoff shocks. Effort cannot be sustained in any finite memory purifiable equilibria; existing constructions fail to be purifiable. To address this problem, we allow the principal and agent to make simultaneous cheap talk announcements at the end of each period. This allows effort to be sustained with positive probability in every period, thereby we can approximate efficiency if the noise in monitoring is small. If we allow for a mediator, we can ensure payoffs arbitrarily close to full efficiency with non-vanishing noise, provided that the agents are sufficiently patient.