Double-Sided Moral Hazard, Efficiency Wages and Litigation

Oliver Gürtler and Matthias Kräkel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.

Keywords: double-sided moral hazard; efficiency wage; litigation; contest; settlement (search for similar items in EconPapers)
JEL-codes: D86 J33 K41 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-bec, nep-lab and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://epub.ub.uni-muenchen.de/13338/1/214.pdf (application/pdf)

Related works:
Journal Article: Double-Sided Moral Hazard, Efficiency Wages, and Litigation (2010)
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:trf:wpaper:214

Access Statistics for this paper

More papers in Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich Geschwister-Scholl-Platz 1, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Tamilla Benkelberg (sfb-tr15@vwl.uni-muenchen.de).