Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2007/27: Cooperation in knowledge-intensive firms

Ola Kvaløy () and Trond E. Olsen ()
Additional contact information
Ola Kvaløy: Norwegian School of Hotel Management, Dept. of Business Administration, University of Stavanger, Postal: University of Stavanger, Department of Business Administration, Norwegian School of Hotel Management, 4036 Stavanger, Norway
Trond E. Olsen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: The extent to which a knowledge-intensive firm should induce cooperation between its employees is analyzed in a model of relational contracting between a firm (principal) and its employees (two agents). The agents can cooperate by helping each other, i.e. provide effort that increases the performance of their peer without affecting their own performance. We extend the existing literature on agent-cooperation by analyzing the implications of incomplete contracts and agent hold-up. A main result is that if the agents' hold-up power is sufficiently high, then it is suboptimal for the principal to implement cooperation, even if helping effort is productive per se. This implies, contrary to many property rights models, that social surplus may suffer if the investing parties (here the agents) are residual claimants. The model also shows that long-term relationships facilitate cooperation even if the agents cannot monitor or punish each others effort choices.

Keywords: Relational contracts; multiagent moral hazard; endogenous hold-up

JEL-codes: D23; J33; L14

32 pages, November 30, 2007

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