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Reputations, Relationships and the Enforcement of Incomplete Contracts

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  • W. Bentley MacLeod

Abstract

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 that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient 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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1730.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1730

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Keywords: contract; law and economics; reputation; repeated games; incomplete contracts; transactions costs; institutional economics; contract enforcement;

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Cited by:
  1. Swinnen Johan & Vandeplas Anneleen, 2012. "Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains," Journal of Globalization and Development, De Gruyter, vol. 2(2), pages 1-30, January.
  2. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the interaction of enforcement institutions," Policy Research Working Paper Series 4090, The World Bank.
  3. Cordero Salas, Paula, 2013. "Designing contracts for reducing emissions from deforestation and forest degradation," Policy Research Working Paper Series 6503, The World Bank.
  4. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran A., 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  5. Edward J. Kane, 2006. "Basel II: A Contracting Perspective," NBER Working Papers 12705, National Bureau of Economic Research, Inc.
  6. Cordero Salas, Paula & Roe, Brian & Sohngen, Brent, 2013. "Addressing additionality in REDD contracts when formal enforcement is absent," Policy Research Working Paper Series 6502, The World Bank.
  7. Michael D. Ryall & Rachelle C. Sampson, 2009. "Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects," Management Science, INFORMS, vol. 55(6), pages 906-925, June.

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