Double-Sided Moral Hazard, Efficiency Wages and Litigation

Oliver Gürtler () and Matthias Kräkel ()

No 214, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.

Keywords: double-sided moral hazard; efficiency wage; litigation; contest; settlement (search for similar items in EconPapers)
JEL-codes: D86 J33 K41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-lab and nep-law
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Working Paper: Double-Sided Moral Hazard, Efficiency Wages and Litigation (2007)
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