The relational underpinnings of formal contracting and the welfare consequences of legal system improvement

Benjamin Hermalin, Larry Li and Tony Naughton

Economics Letters, 2013, vol. 119, issue 1, 72-76

Abstract: We consider how parties’ formal contracts are underpinned by their ongoing relationship and how welfare changes as the legal system improves. Regardless of impatience, the parties write formal contracts that they would not honor–despite stipulated penalties–if they interacted only once. The change in welfare with an improvement in the legal system can be ambiguous and even non-monotonic.

Keywords: Legal system improvement; Relational contracting; Formal and informal contracting (search for similar items in EconPapers)
JEL-codes: C7 K4 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:119:y:2013:i:1:p:72-76

DOI: 10.1016/j.econlet.2013.01.025

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