A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict. Finally, we show that liquidity constraints limit the manager's ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less. (JEL C73, D74, D86, J33, J41, M12)

Products are increasingly made by assembling separately produced modules. Motivated by the notion that a firm’s production function drives its organization, we explore how modular production shapes a firm’s communication structure. Decisions are partitioned into modules and require closer coordination within modules than across. Each agent knows the state his decision must be adapted to. The principal decides whom each agent tells about his state, given that each communication link comes at a cost. We show that optimal communication networks follow a simple threshold rule and exhibit the threshold property. We discuss comparative statics, applications, and empirical implications.

Expert advice often extends beyond a simple recommendation, including information about alternative options. To explore the role of this referential advice, we enrich the expert’s informational advantage in a canonical model of communication with hard information. We show that when constructed just right, referential advice dissuades the decision maker from choosing options other than the recommendation, thereby making the recommendation itself more persuasive. We identify an equilibrium in which, with probability 1, the expert is strictly better off providing referential advice than she is in any equilibrium in which she provides a recommendation alone.