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Contractual incompleteness as a signal of trust

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  • Herold, Florian
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    Abstract

    This paper shows how the fear of signaling distrust can endogenously lead to incomplete contractual agreements. We consider a principal agent relationship where the agent may be trustworthy (dedicated to the project) or not. The principal may trust the agent (i.e. have a high belief of facing a trustworthy agent), or distrust him. The proposal of a complete contract, including fines and other explicit incentives, is shown to signal distrust. When trust is important in some non-contractible part of the relationship, a principal may prefer to leave the contract incomplete rather than to signal distrust by proposing a complete contract. Contractual incompleteness arises endogenously due to asymmetric information about how much one partner trusts the other side.

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    Bibliographic Info

    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 68 (2010)
    Issue (Month): 1 (January)
    Pages: 180-191

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    Handle: RePEc:eee:gamebe:v:68:y:2010:i:1:p:180-191

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    Web page: http://www.elsevier.com/locate/inca/622836

    Related research

    Keywords: Trust Incomplete contracts Signaling;

    References

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    Cited by:
    1. Niklas Bengtsson & Per Engstrom, 2011. "Control and efficiency in the nonprofit sector: Evidence from a randomized policy experiment," Natural Field Experiments 00316, The Field Experiments Website.
    2. Friebel, Guido & Schnedler, Wendelin, 2007. "Team Governance: Empowerment or Hierarchical Control," CEPR Discussion Papers 6575, C.E.P.R. Discussion Papers.
    3. Schnedler, Wendelin & Vanberg, Christoph, 2014. "Playing 'Hard to Get': An Economic Rationale for Crowding Out of Intrinsically Motivated Behavior," IZA Discussion Papers 8108, Institute for the Study of Labor (IZA).
    4. von Siemens, Ferdinand A., 2013. "Intention-based reciprocity and the hidden costs of control," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 55-65.
    5. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
    6. Joseph Lanfranchi & Mathieu NARCY, 2012. "Effort and Monetary Incentives in Nonprofit and For-Profit Organizations," Working Papers halshs-00856261, HAL.
    7. Bengtsson, Niklas & Engström, Per, 2011. "Control and Efficiency in the Nonprofit Sector: Evidence from a Randomized Policy Experiment," Working Paper Series, Center for Labor Studies 2011:6, Uppsala University, Department of Economics.
    8. Ferdinand von Siemens, 2011. "Intention-Based Reciprocity and the Hidden Costs of Control," Tinbergen Institute Discussion Papers 11-115/1, Tinbergen Institute.
    9. Maija Halonen-Akatwijuka & Oliver D. Hart, 2013. "More is Less: Why Parties May Deliberately Write Incomplete Contracts," NBER Working Papers 19001, National Bureau of Economic Research, Inc.
    10. Silvia Dominguez Martinez & Randolph Sloof & Ferdinand von Siemens, 2010. "Monitoring your Friends, not your Foes: Strategic Ignorance and the Delegation of Real Authority," Tinbergen Institute Discussion Papers 10-101/1, Tinbergen Institute.

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