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

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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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Bibliographic Info

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
Phone: +390672595601
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Web page: http://www.ceistorvergata.it
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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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Web: http://www.ceistorvergata.it

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Keywords: Implicit contracts; incomplete contracts; repeated games;

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Cited by:
  1. Sergio Vergalli & Chiara D’Alpaos & Michele Moretto & Paola Valbonesi, 2009. ""It Is Never too late": Optimal Penalty for Investment Delay in Public Procurement Contracts," Working Papers 2009.78, Fondazione Eni Enrico Mattei.
  2. Butler, Jeffrey V. & Carbone, Enrica & Conzo, Pierluigi & Spagnolo, Giancarlo, 2013. "Reputation and Entry," Konkurrensverket Working Paper Series in Law and Economics 2013:3, Konkurrensverket (Swedish Competition Authority).
  3. Martimort, David & Semenov, Aggey & Stole, Lars, 2014. "A Theory of Contracts With Limited Enforcement," MPRA Paper 53504, University Library of Munich, Germany.
  4. Anita Kopanyi-Peuker & Theo Offerman & Randolph Sloof, 2012. "Fostering Cooperation through the Enhancement of Own Vulnerability," Tinbergen Institute Discussion Papers 12-132/I, Tinbergen Institute.
  5. James Malcomson, 2010. "Relational Incentive Contracts," Economics Series Working Papers 508, University of Oxford, Department of Economics.

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