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Prohibitions on Punishments in Private Contracts

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Author Info
Philip Bond () (University of Pennsylvania)
Andrew F. Newman () (Boston University, Department of Economics)

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Abstract

In most contemporary economies loan contracts cannot mandate imprison- ment or other non-pecuniary punishments for defaulting debtors. A possible rationale for contracting restrictions of this type is that imprisonment imposes negative externalities on individuals not party to the original loan contract. We explore the ability of such externalities to account for the legal restriction that private contracts cannot threaten non-pecuniary punishments. We consider both the “classical” case in which the negative externality is imposed on future trading partners, and the “behavioral” case in which the negative externality is imposed on an agent’s future self.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-060.

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Length: 35 pages
Date of creation: Nov 2006
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Handle: RePEc:bos:wpaper:wp2006-060

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September. [Downloadable!] (restricted)
  2. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
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