Hanzhe Li (University of Hong Kong); Jin Li (University of Hong Kong); Yunchou Zhang (University of Hong Kong)
Abstract
Although rules are often seen as rigid, their enforcement can be flexible. We develop a relational contract model between a manager and a worker to characterize how rules are dynamically enforced. Our results reveal two approaches: the manager-led approach, involving cycles of rule enforcement and optimal when enforcement costs are low, and the worker-led approach, relying on worker self-regulation and emerging as enforcement costs rise. Under intermediate enforcement costs, a subcategory arises where the manager initially enforces rules before transitioning to worker autonomy. Interestingly, when rules can be enforced after the worker’s participation, higher enforcement costs may benefit the manager.