Globally Incentives-Compatible Contracts Under Weak Third Party Enforcement

Raul Fabella

No 200507, UP School of Economics Discussion Papers from University of the Philippines School of Economics

Abstract: We explore how the structure of incentives contracts adjusts to the creation of quasi-rents by the delivery of certain types of contract obligations under weak third party enforcement (TPE). The situation invites quasi-rent appropriation by some contractor. We focus on possible ex-post opportunism by the principal. We propose the concept of globally incentives compatible (GIC) contracts, where no contractor has the incentive to deviate ex-post from the obligations set ex-ante in the contract. We model optimal appropriation by the principal and the response of the agent when the contract is not GIC. The conditions that guarantee GIC for principal-agent the incentives contracts under weak TPE are investigated.

Keywords: global incentives compatibility; quasi-rent; third party enforcement incentives contract (search for similar items in EconPapers)
Pages: 15 pages
Date: 2005-08
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Published as UPSE Discussion Paper No. 2005-07, August 2005

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Persistent link: https://EconPapers.repec.org/RePEc:phs:dpaper:200507

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