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Guanxi is prevailing in China and East Asia and has received widespread attention. We take Guanxi as an exogenous implicit contract and employ a standard principal-agent contract to deal with the interest conflicts based on explicit project performance to build a principal-agent model where the principal (the owner or sponsor) chooses a Guanxi action and an endogenous contract based on explicit (synthesized) project performance to stimulate the agent (the manager). The results show that conditioned on the optimal explicit principal-agent contract, the principalpsilas maintaining the Guanxi elicits higher efforts by the agent and then higher project performance is to be achieved, but whether the principal maintains the Guanxi depends on the trade-off between Guanxi action cost and extra Guanxi benefit and is irrelevant to how that benefit is distributed between the principal and the agent.
Date of Conference: 10-12 Sept. 2008