Incentive Contracts with Enforcement Costs
AbstractLegal enforcement of contracts is expensive and therefore parties will typically negotiate to avoid these costs. However, if negotiation takes place under asymmetric information, enforcement will occur in some states. We study a simple principal-agent model with risk neutrality and limited liability and assume costly, nonautomatic enforcement and private information by the principal. We show that the form of the contract systematically affects the likelihood of proceeding to court. In order to reduce the probability of enforcement, an optimal incentive contract must be one step. In addition, the principal may leave the agent with some surplus and effort will typically deviate from the productively efficient level. (JEL D82, D86, K40) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: email@example.com, Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal The Journal of Law, Economics, & Organization.
Volume (Year): 26 (2010)
Issue (Month): 1 (April)
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
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- Elisabetta Iossa & Giancarlo Spagnolo, 2009.
"Contracts as Threats: on a Rationale For Rewarding A while Hoping For B,"
CEIS Research Paper
147, Tor Vergata University, CEIS, revised 30 Sep 2009.
- Iossa, Elisabetta & Spagnolo, Giancarlo, 2011. "Contracts as Threats: on a Rationale For Rewarding A while Hoping For B," CEPR Discussion Papers 8195, C.E.P.R. Discussion Papers.
- Elisabetta Iossa & Giancarlo Spagnolo, 2008. "Contracts as Threats: on a Rationale For Rewarding A while Hoping For B," EIEF Working Papers Series 1022, Einaudi Institute for Economic and Finance (EIEF), revised Dec 2010.
- Kvaløy, Ola & Olsen, Trond, 2012.
"Incentive provision when contracting is costly,"
UiS Working Papers in Economics and Finance
2012/16, University of Stavanger.
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