Double-Sided Moral Hazard, Efficiency Wages and Litigation

Oliver Gürtler and Matthias Kräkel

No 14/2007, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifi- able 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 sit- uations 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
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Related works:
Journal Article: Double-Sided Moral Hazard, Efficiency Wages, and Litigation (2010)
Working Paper: Double-Sided Moral Hazard, Efficiency Wages and Litigation (2007)
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