This paper investigates relational incentive contracts with a continuum of privatelyobserved agent types that are persistent over time.For a sufficiently productive relationship, a full pooling contract exists in which all agent types continuing the relationship choose the same action.When some separation is feasible, the parties can do better than with full pooling.When future actions are optimal, however, full separation of all types is not possible.There is, though, an equilibrium with separation into pools each containing a non-degenerate interval of types and fully separating individual types is not generally optimal.Separation results in an increase in output.

What is the role of a country's financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of finance are dictated by an intermediary's ability to monitor and control a firm's cash flow, in conjunction with the structure of the technology that the firm adopts. It is not always profitable to finance promising technologies. A quantitative illustration is presented where financial frictions induce entrepreneurs in India and Mexico to adopt less‐promising ventures than in the United States, despite lower input prices.

We consider a decision maker who ranks actions according to the smooth ambiguity criterion of Klibanoff, Marinacci, and Mukerji (2005). An action is justifiable if it is a best reply to some belief over probabilistic models. We show that higher ambiguity aversion expands the set of justifiable actions. A similar result holds for risk aversion. Our results follow from a generalization of the duality lemma of Wald (1949) and Pearce (1984). [web URL: http://onlinelibrary.wiley.com/doi/10.3982/ECTA14429/abstract]