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Reputations, Relationships and the Enforcement of Incomplete Contracts

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  • MacLeod, W. Bentley

    (Princeton University)

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

  • MacLeod, W. Bentley, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," IZA Discussion Papers 1978, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp1978
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    7. Cordero Salas, Paula, 2013. "Cooperation and reciprocity in carbon sequestration contracts," Policy Research Working Paper Series 6521, The World Bank.
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    More about this item

    Keywords

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