The interaction of explicit and implicit contracts: A signaling approach

Marc Gürtler and Oliver Gürtler

No IF38V1, Working Papers from Technische Universität Braunschweig, Institute of Finance

Abstract: We analyze the interaction of explicit and implicit contracts in a model with selfish and fair principals. Fair principals are willing to honor implicit agreements, whereas selfish principals are not. Principals are privately informed about their types. We investigate a separating equilibrium in which principals reveal their type through the contract o er to the agent. If this equilibrium is played, explicit and implicit contracts are substitutes. Since the agent learns the principal's type, a selfish principal has to rely on explicit incentives. A fair principal, by contrast, can effectively induce implicit incentives and hence does not need to use explicit incentives. Interestingly, if a selfish principal can rely on more effective explicit incentives, a fair principal becomes more likely to be able to separate from the selfish type and, hence, to make better use of implicit incentives. In this sense, there is a strategic complementarity between explicit and implicit incentives.

Keywords: explicit contracts; implicit contracts; separating equilibrium; substitutes; strategic; complementarity (search for similar items in EconPapers)
JEL-codes: D82 D86 M52 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm and nep-mic
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Journal Article: The interaction of explicit and implicit contracts: A signaling approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tbsifw:if38v1

DOI: 10.2139/ssrn.2031582

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