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Reputations, Relationships and the Enforcement of Incomplete Contracts

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Author Info
W. Bentley MacLeod () (Columbia University and IZA Bonn)

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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 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
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Handle: RePEc:iza:izadps:dp1978

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

Other versions of this item:

Find related papers by JEL classification:
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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Full references

Cited by:
(explanations, 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. Dhillon, Amrita & Rigolini, Jamele, 2006. "Development and the Interaction of Enforcement Institutions," The Warwick Economics Research Paper Series (TWERPS) 748, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  2. Edward J. Kane, 2006. "Basel II: A Contracting Perspective," NBER Working Papers 12705, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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