Delegating relational contracts to corruptible intermediarie

This article explores the link between productive relational contracts and corruption. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agent, neither of which are explicitly contractible. We characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus, kickbacks and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own. JEL classifications: D73, D86, L14.