The interaction of explicit and implicit contracts: A signaling approach
AbstractWe analyze the interaction of explicit and implicit contracts in a model with selfish and fair principals. Fair principals are willing to honor implicit agreements, whereas selfish principals are not. Principals are privately informed about their types. We investigate a separating equilibrium in which principals reveal their type through the contract o er to the agent. If this equilibrium is played, explicit and implicit contracts are substitutes. Since the agent learns the principal's type, a selfish principal has to rely on explicit incentives. A fair principal, by contrast, can effectively induce implicit incentives and hence does not need to use explicit incentives. Interestingly, if a selfish principal can rely on more effective explicit incentives, a fair principal becomes more likely to be able to separate from the selfish type and, hence, to make better use of implicit incentives. In this sense, there is a strategic complementarity between explicit and implicit incentives. --
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Bibliographic InfoPaper provided by Technische Universität Braunschweig, Institute of Finance in its series Working Papers with number IF38V1.
Date of creation: 2012
Date of revision:
explicit contracts; implicit contracts; separating equilibrium; substitutes; strategic; complementarity;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-23 (All new papers)
- NEP-BEC-2012-04-23 (Business Economics)
- NEP-CTA-2012-04-23 (Contract Theory & Applications)
- NEP-HRM-2012-04-23 (Human Capital & Human Resource Management)
- NEP-MIC-2012-04-23 (Microeconomics)
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