Self-Enforcing Contracts in Continuous Time

Martin Dumav

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We study self-enforcing contracts in a continuous-time Poisson framework, where a risk-neutral agent with limited liability exerts effort to increase the likelihood of success in a good-news project. Dynamic enforcement is irrelevant for contracts aimed at avoiding bad outcomes but important when effort generates positive outcomes. We propose a two-step approach: first, we characterize the optimal commitment contract under an exogenous bound on the agent’s continuation utility; second, we determine the maximal bound the principal can credibly offer to implement the optimal self-enforcing contract. The resulting contract backloads payments and features a termination threshold, a partial-bonus threshold, and a full-bonus threshold. Comparative statics show that self-enforcing contracts more closely approximate the commitment benchmark when projects are either gradualist—featuring more frequent, smaller successes—or smaller in scale, with lower effort costs and reduced success payoffs. These patterns imply that, in environments lacking strong institutions, ambitious or high-scale projects are unlikely to be undertaken, effectively limiting the scope of self-enforcement to gradualist or low-scale undertakings.

Keywords: Self-enforcing; contracts; Relational; contracting; Dynamic; moral; hazard; Gradualist; and; small-scale; projects; Institutions; Investment; and; development (search for similar items in EconPapers)
JEL-codes: C73 D24 D82 D86 L14 O43 (search for similar items in EconPapers)
Date: 2026-06-22
References: Add references at CitEc
Citations:

Downloads: (external link)
https://e-archivo.uc3m.es/rest/api/core/bitstreams ... 1557f1097df5/content (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:50300

Access Statistics for this paper

More papers in UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
Bibliographic data for series maintained by Ana Poveda ().