Reputations, Relationships and the Enforcement of Incomplete Contracts
نویسنده
چکیده
This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Le er (1981)) and e ciency wages (Shapiro and Stiglitz (1984)), have been o ered as solutions to the problem of enforcing an incomplete contract. It is shown that the e ciency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor e ciency wages is the most e cient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law. JEL Classi cation: D86, K12, C7, O17
منابع مشابه
Reputations, Relationships and the Enforcement of Incomplete Contracts Incomplete∗- Comments welcome
This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown t...
متن کاملReputations, Relationships and Contract Enforcement∗ Forthcoming in Journal of Economic Literature
When the quality of a good is at the discretion of the seller, how can buyers assure that the seller provides the mutually efficient level of quality? Contracts that provide a bonus to the seller if the quality is acceptable, or impose a penalty on the seller if quality is unacceptable, can in theory provide efficient incentives. But how are such contracts enforced? While the courts can be used...
متن کاملNo 820 August 2007 Trust - Based Trade Luis Araujo and Emanuel Ornelas
Weak enforcement of international contracts can substantially reduce international trade. We develop a model where agents build reputations to overcome the difficulties that this institutional failure causes in a context of incomplete information. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. We find that the conditional pr...
متن کاملOrder With Some Law: Complementarity VS. Substitution of Formal and Informal Arrangements
While some argue that incomplete incentive contracts facilitate the self-enforcement of informal dealings, other authors submit that they substitute for or “crowd out” social norms supporting informal arrangements. We use experimental evidence to test these theories by manipulating the extent to which individuals transact repeatedly and the level of contract costs. We find that, by enforcing co...
متن کاملReputations and Sovereign Debt
Why do countries repay their debts? If countries in default have sufficient opportunities to save, Bulow and Rogoff [6] have shown that the answer cannot stem from a country’s desire to preserve a reputation for repayment. As a result, researchers have explained the existence of sovereign debt by either placing restrictions on the deposit contracts banks can offer, or by looking outside the cre...
متن کامل