Relative-performance evaluation (RPE) contracts, which make one farmer’s reward a non-increasing function of observed outcomes on other agent’s projects, build on his insight (Mookherjee 1984). There is convincing evidence to suggest that RPE contracts are ubiquitous and play an important role in many types of agricultural labor and financial contracts. For example, RPE contracts that tie a farmer’s return to industry averages of yield or quantity are commonly used in livestock raising and agroindustry commodities (Knoerber and Thurman 1994). Hueth and Ligon (2001) argue that relative performance incentives are also built into many other types of contracts via payment mechanisms that depend on market prices.


Lambert (1983) and others have shown how the basic one period moral hazard problem can be extended into a multi-period environment with commitment. When either or both parties can commit to a multi-period sharing rule there is a scope for improvement over the one-shot contract. The optimal multi-period optimal sharing rule can be interpreted as a sort of ‘reputation’ updating mechanism in which the amount of state-contingent default (insurance) that a creditor is willing to provide a borrower following a bad realization in any given period is made to depend in part on that borrower’s past history of realization. Contracts will have ‘memory’ in the sense that agent who had good (bad) realization in the recent past will be rewarded (punished) by raising (lowering) the return they can expect following any future realization. A good reputation is like an earn privilege that provide access to future surplus. The prospect of earning, or the fear of losing, this privilege can act as an effective incentive to economize on present period incentives. The ability of the principal to commit to delivering rewards for current or past good behavior allow for the provision of both better incentives and more insurance over the life of the contract compared to a series of one period.