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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.

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  • W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo.
    • Handle: RePEc:ces:ceswps:_1730
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    3. 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.
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    5. Cordero Salas, Paula, 2013. "Cooperation and reciprocity in carbon sequestration contracts," Policy Research Working Paper Series 6521, The World Bank.
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    Keywords

    contract; law and economics; reputation; repeated games; incomplete contracts; transactions costs; institutional economics; contract enforcement;
    All these keywords.

    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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