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Implicit Contracts: Two Different Approaches

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  • Gürtler, Oliver
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    Abstract

    In this paper, I compare two different approaches to model implicit contracting, the infinite-horizon approach typically used in the literature and afinite-horizon approach building on an adverse-selection model. I demonstrate that even the most convincing result of the infinite-horizon approach, namely that implicit contracting is improved, if the discountrate is lowered, does not carry over to the alternative modeling approach. Predictions of the first approach should therefore be handled with care and subject to athorough reinvestigation.

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    File URL: http://epub.ub.uni-muenchen.de/13441/1/110.pdf
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    Bibliographic Info

    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 110.

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    Date of creation: Apr 2006
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    Handle: RePEc:trf:wpaper:110

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    Keywords: Trust; finite horizon; infinite horizon; discounting; implicit contracting;

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