Relational Contracts: Public Versus Private Savings

78 Pages Posted: 20 May 2020

See all articles by Francesc Dilme

Francesc Dilme

University of Bonn

Daniel Ferguson Garrett

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: May 2020

Abstract

We study relational contracting with an agent who has consumption-smoothing preferences as well as the ability to save to defer consumption (or to borrow). Our focus is the comparison of principal-optimal relational contracts in two settings. The first where the agent's consumption and savings decisions are private, and the second where these decisions are publicly observed. In the first case, the agent smooths his consumption over time, the agent's effort and payments eventually decrease with time, and the balances on his savings account eventually increase. In the second, the agent consumes earlier than he would like, consumption and the balance on savings fall over time, and effort and payments to the agent increase. Our results suggest a possible explanation for low savings rates in certain industries where compensation often comes in the form of discretionary payments.

Keywords: private savings, Relational Contracts

JEL Classification: C73, J30

Suggested Citation

Dilme, Francesc and Garrett, Daniel Ferguson, Relational Contracts: Public Versus Private Savings (May 2020). CEPR Discussion Paper No. DP14722, Available at SSRN: https://ssrn.com/abstract=3603951

Francesc Dilme (Contact Author)

University of Bonn ( email )

Lennestrasse 35
53113 Bonn
Germany
0049228737957 (Phone)

Daniel Ferguson Garrett

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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