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Contracts as Threats: on a Rationale For Rewarding A while Hoping For B

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Author Info
Elisabetta Iossa () (Faculty of Economics, University of Rome "Tor Vergata")
Giancarlo Spagnolo () (Faculty of Economics, University of Rome "Tor Vergata")
Abstract

In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non) implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 147.

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Length: 35 pages
Date of creation: 30 Sep 2009
Date of revision: 30 Sep 2009
Handle: RePEc:rtv:ceisrp:147

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Related research
Keywords: Implicit contracts; incomplete contracts; repeated games;

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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