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The optimal disclosure policy when firms offer implicit contracts
Author(s) -
Mukherjee Arijit
Publication year - 2010
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2010.00111.x
Subject(s) - business , microeconomics , industrial organization , economics , monetary economics
The observability of history is crucial for the sustenance of implicit (or relational) contracts. When a firm hires a sequence of short‐lived workers, turnover adversely affects the observability of history—the old worker may leave the firm before communicating the history to the young. However, turnover can also enhance profits if matching gains can be extracted up front. Disclosure of the workers' productivity information affects turnover by mitigating adverse selection. Thus, the optimal disclosure policy trades off matching efficiency with the sustainability of implicit contracts. I show that (i) opaqueness can be optimal only for firms with moderate reputation concerns, and (ii) an opaque firm's profit may decrease with its reputation concern.