“Relational Contracts, Limited Liability, and Employment Dynamics” by Jin Li
This paper studies a model of relational contracts of imperfect public monitoring when the agent has limited liability. The optimal relational contract provides joint and definitive implications on worker's job security, average earning, and the sensitivity of pay to performance over time as the employment relationship progresses. In addition, we analyze how the employment dynamics change with respect to the surplus in the relationship and firm's ability to commit to long-term long contract. Our results shed light on empirical findings that relate employment dynamics with firm characteristics.