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

Elisabetta Iossa and Giancarlo Spagnolo

No 147, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non) implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.

Keywords: Implicit contracts; incomplete contracts; repeated games (search for similar items in EconPapers)
JEL-codes: C73 D86 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2009-09-30, Revised 2009-09-30
New Economics Papers: this item is included in nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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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 (2010)
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