Contracts as Threats: on a Rationale For Rewarding A while Hoping For B

Elisabetta Iossa and Giancarlo Spagnolo

No 1022, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: Contracts often reward inefficient tasks and are not enforced ex post. We provide an explanation based on the relationship between explicit contracts and implicit agreements. We show that signing but then ignoring contractual clauses requiring costly, inefficient, verifiable tasks (A) may facilitate relational contracting on efficient noncontractible tasks (B) by anticipating and strengthening punishments following defections. With adverse selection, it is optimal to choose tasks A analogous to B in terms of required skills. We also explain why stipulated damages must be moderate in size. These results apply independently of whether B is a 'productive' task or a 'bribe'.

Pages: 31 pages
Date: 2008, Revised 2010-12
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Related works:
Working Paper: Contracts as Threats: on a Rationale For Rewarding A while Hoping For B (2011)
Working Paper: Contracts as Threats: on a Rationale For Rewarding A while Hoping For B (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1022

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