The question of how to develop a relationship is central to business and management. This is especially true when the environment is characterized by informational asymmetries and subjectivity, as for example in management consulting. This article presents a model of relationship building inspired by the consultant–client relationship. Consistent with the evidence, it shows that consultants and clients optimally start with low-risk, low-return projects, and move up to high-risk, high-return projects over time as they accumulate relationship capital. The probability of conflict and breakup is decreasing over the course of the relationship, but may jump when a higher-risk project is adopted.
This article studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I consider a principal-agent setting where the principal has persistent private information about her outside option. I show that if the principal has the bargaining power, she wants to understate her outside option to provide strong incentives and then renege on promised payments, while if the uninformed agent has the bargaining power, the principal wants to overstate her outside option to capture more surplus. I characterize how information is revealed, how the relationship evolves, and how this depends on bargaining power.
Who pays for financial crises? What are the mechanisms for spreading the cost across different social groups? The literature is only beginning to provide answers to these crucial questions. Several papers measure the depth and duration of crises, defined as the cumulative output loss and recovery time, and conclude that these crises have been very costly for developed and emerging economies. The period 1973-97 registered more than forty-four crises in developed countries and ninety-five in emerging markets, with average output losses of 6.25 percent and 9.21 percent of gross domestic product (GDP), respectively.
Different forces and potential benefits are pushing towards increasing financial globalization. However, globalization can carry important risks. This paper reviews the literature on crises and contagion in the context of financial globalization. Countries with weak fundamentals become more prone to crises when they liberalize their financial sectors. Globalization can also lead to crises in countries with sound fundamentals, due to imperfections in financial markets or external factors. Moreover, open economies are exposed to contagion via different channels such as real links, financial links, and herding behavior. Still, in the long run, the net effects of financial globalization are likely to be positive. The main challenge for policymakers is thus to manage the process as to take advantage of the opportunities, while minimizing the risks.