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Reputations, Relationships and the Enforcement of Incomplete Contracts

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  • W. Bentley MacLeod

Abstract

This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.

Suggested Citation

  • W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1730
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    Cited by:

    1. Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 39-53, October.
    2. Salas, Paula Cordero & Roe, Brian E. & Sohngen, Brent, 2012. "Addressing Additionality in REDD Contracts when Formal Enforcement is Absent," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124505, Agricultural and Applied Economics Association.
    3. Hémous, David & Olsen, Morten, 2015. "Long-term Relationships: Static Gains and Dynamic Inefficiencies," CEPR Discussion Papers 10490, C.E.P.R. Discussion Papers.
    4. Dhillon, Amrita & Rigolini, Jamele, 2011. "Development and the interaction of enforcement institutions," Journal of Public Economics, Elsevier, vol. 95(1), pages 79-87.
    5. Michael D. Ryall & Rachelle C. Sampson, 2009. "Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects," Management Science, INFORMS, vol. 55(6), pages 906-925, June.
    6. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran A., 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    8. Sylvaine Lemeilleur, 2014. "The role of input vouchers in modernizing the fresh fruit and vegetable market in Turkey," Agricultural Economics, International Association of Agricultural Economists, vol. 45(4), pages 477-487, July.
    9. Meyer Susanne, 2012. "The world’s factory and informal ties – organisation of firm networks in the electronics industry in the Greater Pearl River Delta, China," Zeitschrift für Wirtschaftsgeographie, De Gruyter, vol. 56(1-2), pages 9-24, October.
    10. Swinnen Johan & Vandeplas Anneleen, 2012. "Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains," Journal of Globalization and Development, De Gruyter, vol. 2(2), pages 1-30, January.
    11. Keck, Alexander & Schropp, Simon, 2007. "Indisputably essential: The economics of dispute settlement institutions in trade agreements," WTO Staff Working Papers ERSD-2007-02, World Trade Organization (WTO), Economic Research and Statistics Division.
    12. Cordero Salas, Paula, 2013. "Designing contracts for reducing emissions from deforestation and forest degradation," Policy Research Working Paper Series 6503, The World Bank.
    13. Edward Kane, 2007. "Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 399-409, December.

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    Keywords

    contract; law and economics; reputation; repeated games; incomplete contracts; transactions costs; institutional economics; contract enforcement;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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