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The relational underpinnings of formal contracting and the welfare consequences of legal system improvement

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  • Hermalin, Benjamin E.
  • Li, Larry
  • Naughton, Tony

Abstract

We consider how parties’ formal contracts are underpinned by their ongoing relationship and how welfare changes as the legal system improves. Regardless of impatience, the parties write formal contracts that they would not honor–despite stipulated penalties–if they interacted only once. The change in welfare with an improvement in the legal system can be ambiguous and even non-monotonic.

Suggested Citation

  • Hermalin, Benjamin E. & Li, Larry & Naughton, Tony, 2013. "The relational underpinnings of formal contracting and the welfare consequences of legal system improvement," Economics Letters, Elsevier, vol. 119(1), pages 72-76.
    • Handle: RePEc:eee:ecolet:v:119:y:2013:i:1:p:72-76
    DOI: 10.1016/j.econlet.2013.01.025
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    References listed on IDEAS

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    Cited by:

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    3. Marina Halac, 2015. "Investing in a relationship," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 165-185, March.

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    More about this item

    Keywords

    Legal system improvement; Relational contracting; Formal and informal contracting;
    All these keywords.

    JEL classification:

    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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