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Contracts as Threats: On a Rationale for Rewarding A while Hoping for B,” mimeo (2009)
| Citations: | 4 - 0 self |
BibTeX
@MISC{Iossa09contractsas,
author = {Elisabetta Iossa and Giancarlo Spagnolo},
title = {Contracts as Threats: On a Rationale for Rewarding A while Hoping for B,” mimeo},
year = {2009}
}
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Abstract
In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifi-able but apparently of little use for the principal. The ex-post (non)implementation of such explicit contract can then be discretionally exchanged against the pro-vision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in pro-curement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify. 1
