Reciprocal Agency

I analyze a simple model of reciprocal agency, in which two persons play interchanging roles of agent and principal, and show that optimal contracts can provide more incentives in reciprocal relationships than in unilateral relationships. Moreover, in the sequential setup, there exists a »reverse« ratchet effect; the firstperiod agent exerts more effort in order to make the next-period agent infer more favorable environments, and to make him demand less wages. I apply the model to the Japanese main-bank system and cross-shareholding.