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Reputations, relationships and the enforcement of incomplete contracts

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Author Info
W. Bentley MacLeod () (Columbia University - Department of Economics)

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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 Columbia University, Department of Economics in its series Discussion Papers with number 0506-23.

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Length: 50 pages
Date of creation: 2006
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Handle: RePEc:clu:wpaper:0506-23

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Cited by:
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  1. Swapnendu Banerjee, 2007. "Rent a Womb: Surrogate Selection, Investment Incentives and Contracting," Working Papers id:1021, esocialsciences.com. [Downloadable!]
  2. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the interaction of enforcement institutions," Policy Research Working Paper Series 4090, The World Bank. [Downloadable!]
    Other versions:
  3. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran, 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). [Downloadable!]
  4. Edward J. Kane, 2006. "Basel II: A Contracting Perspective," NBER Working Papers 12705, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Edward Kane, 2007. "Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process," Atlantic Economic Journal, International Atlantic Economic Society, vol. 35(4), pages 399-409, December. [Downloadable!] (restricted)
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