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Reputations, Relationships and the Enforcement of Incomplete Contracts

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  • MacLeod, W. Bentley

    ()
    (Columbia University)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1978.

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Length: 50 pages
Date of creation: Feb 2006
Date of revision:
Publication status: published in: Journal of Economic Literature, 2007, 45(3), 595-628
Handle: RePEc:iza:izadps:dp1978

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

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Cited by:
  1. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the interaction of enforcement institutions," Policy Research Working Paper Series 4090, The World Bank.
  2. 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.
  3. Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer, vol. 32(1), pages 39-53, October.
  4. Swinnen, Johan F.M. & Vandeplas, Anneleen, 2009. "Rich consumers and poor producers: Quality and rent distribution in global value chains," IFPRI discussion papers 932, International Food Policy Research Institute (IFPRI).
  5. 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.
  6. Cordero Salas, Paula, 2013. "Designing contracts for reducing emissions from deforestation and forest degradation," Policy Research Working Paper Series 6503, The World Bank.
  7. 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).

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