The extent to which a knowledge‐intensive firm should induce cooperation between its employees is analyzed in a relational contracting model. We extend the existing literature on agent cooperation by analyzing the implications of incomplete contracts and agent holdup. A main result is that if the agents’ holdup power is sufficiently high, it is suboptimal to implement cooperation, even if helping effort is productive. This implies, contrary to many property rights models, that surplus may suffer if the investing parties (the agents) are residual claimants. We also show that long‐term relationships facilitate cooperation even if agents cannot monitor or punish each other.
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