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For Better or Forever: Formal versus Informal Enforcement

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  • Joel Sobel

    (University of California, San Diego)

Abstract

This article contrasts supporting partnerships through relational contracting and supporting partnerships through formal legal institutions. A large population of players interact in bilateral relationships. Efficiency requires cooperation, but cheating yields a higher short-term payoff. There is a positive probability that the maximum feasible payoff available to a partnership decreases. Opportunistic behavior makes it impossible to realize the efficient outcome. A legal system can lead to efficient contracting. Without such a system, productive relationships arise in equilibrium if it is costly to initiate new relationships. This type of relational contracting tends to make partnerships last longer than is efficient.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 24 (2006)
Issue (Month): 2 (April)
Pages: 271-298

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Handle: RePEc:ucp:jlabec:v:24:y:2006:i:2:p:271-298

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Web page: http://www.journals.uchicago.edu/JOLE/

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Cited by:
  1. Ola Kvaløy & Trond E. Olsen, 2009. "Endogenous Verifiability and Relational Contracting," American Economic Review, American Economic Association, vol. 99(5), pages 2193-2208, December.
  2. James Malcomson, 2010. "Relational Incentive Contracts," Economics Series Working Papers 508, University of Oxford, Department of Economics.
  3. Hermalin, Benjamin E. & Li, Larry & Naughton, Tony, 2013. "The relational underpinnings of formal contracting and the welfare consequences of legal system improvement," Economics Letters, Elsevier, vol. 119(1), pages 72-76.
  4. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the interaction of enforcement institutions," Policy Research Working Paper Series 4090, The World Bank.
  5. Altmann, Steffen & Falk, Armin & Huffman, David B., 2010. "Implicit Contracts, Unemployment, and Labor Market Segmentation," IZA Discussion Papers 5001, Institute for the Study of Labor (IZA).
  6. Indro, Daniel C. & Richards, Malika, 2007. "The determinants of foreign partner's equity ownership in Southeast Asian joint ventures," International Business Review, Elsevier, vol. 16(2), pages 177-206, April.
  7. Fali Huang, 2006. "The Transition from Relational to Legal Contract Enforcement," Working Papers 23-2006, Singapore Management University, School of Economics.
  8. Rafael Rob & Huanxing Yang, 2006. "Long Term Relationships as Safeguards," Levine's Working Paper Archive 618897000000001039, David K. Levine.

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