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The interaction of explicit and implicit contracts: A signaling approach

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  • Gürtler, Marc
  • Gürtler, Oliver

Abstract

We 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.

Suggested Citation

  • Gürtler, Marc & Gürtler, Oliver, 2012. "The interaction of explicit and implicit contracts: A signaling approach," Working Papers IF38V1, Technische Universität Braunschweig, Institute of Finance.
  • Handle: RePEc:zbw:tbsifw:if38v1
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    More about this item

    Keywords

    explicit contracts; implicit contracts; separating equilibrium; substitutes; strategic; complementarity;

    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 - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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