Interfirm relationships can be successful but are also fraught with problems. We study how to encourage one party, herein the seller, to make a cooperative relation-specific investment that will increase the joint surplus. The seller, fearing he will be held up by the buyer, typically refrains...

The dynamics of incentive contracts under asymmetric information have long been an important topic in economics. We address this topic in this paper by considering a stochastic, two-period principal-agent relationship, in which the true state of the world can take on two possible values and is...

In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or cutting pay. We model this effect as a...