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Incentive provision when contracting is costly

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  • Kvaløy, Ola

    ()
    (UiS)

  • Olsen, Trond

    (NHH)

Abstract

We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. The analysis shows that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We show that there is not a monotonic relationship between contracting costs and incentive intensity, and that an increase in contracting costs may lead to higher-powered incentives. Moreover, we formulate hypotheses about the relationship between legal systems and incentive provision. Specifically, the model predicts higher-powered incentives in common law than in civil law systems.

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Bibliographic Info

Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2012/16.

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Length: 47 pages
Date of creation: 19 Sep 2012
Date of revision:
Handle: RePEc:hhs:stavef:2012_016

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Postal: University of Stavanger, NO-4036 Stavanger, Norway
Web page: http://www.uis.no/research/economics_and_finance
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Cited by:
  1. Kvaløy, Ola & Olsen, Trond, 2012. "The Tenuous Relationship between Effort and Performance Pay," UiS Working Papers in Economics and Finance 2012/11, University of Stavanger.

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