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Delegating relational contracts with corruption (Center for Institutional Studies Research Seminar)

Speaker: Marta Troya Martinez (Assistant Professor, New Economic School)

Speaker: Marta Troya Martinez (Assistant Professor, New Economic School)

December 4, Thursday, Myasnitskaya 24, building 3, room 424, 18.30. 

This article explores the links between productive relational contracts and corruption. The model considers a context where responsibility for a relational contract is delegated to a supervisor who cares in part about the profit of the relationship, and in part about the kickbacks paid by the agent. The agent can both exert effort that increases production and make corrupt kickbacks to the supervisor; the incentives for both come through self-enforcing contracts. We show that delegation to such a supervisor may increase the social welfare. Furthermore, when the future is not very valuable, this is the only way to sustain a productive relational contract. Delegation can ease the time-inconsistency problem of paying ex-post incentive payments; because if the supervisor reneges on such payments, she would damage the corrupt relationship (i.e. she would lose the future stream of kickbacks). We also establish the connection between the agent's compensation scheme, his effort and the associated kickbacks.