Agency Contracts with Long-Term Customer Relationships

Abstract

In certain types of industries contracts for sales agents include both commission payments for sales and clawbacks of these payments if existing clients are not retained. This paper provides a model that shows that contracts with these features arise in equilibrium in environments having: i) up-front selling costs that are re-couped from on-going sales ii) heterogeneous customers iii) limited sales agent access to capital markets and iv) imperfect commitment by customers and agents to long-term contracts. We test the model using information on insurance sales agent contracts in New Zealand prior to and after bank entry into the insurance sales market. Increased policy lapse rates for traditional insurances post bank entry indicate that banks were cream-skimming customers. Our model predicts that in this case bank entry should reduce the value of both initial commissions paid for sales and the clawback for policy lapses. The data support this prediction.