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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.
    • Handle: RePEc:ces:ceswps:_1730
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    2. Dhillon, Amrita & Rigolini, Jamele, 2011. "Development and the interaction of enforcement institutions," Journal of Public Economics, Elsevier, vol. 95(1), pages 79-87.
    3. Cordero Salas, Paula, 2013. "Cooperation and reciprocity in carbon sequestration contracts," Policy Research Working Paper Series 6521, The World Bank.
    4. 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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    6. 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.
    7. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
    8. Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 39-53, October.
    9. 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.
    10. 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.
    11. 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.
    12. David Hémous & Morten Olsen, 2018. "Long-term Relationships: Static Gains and Dynamic Inefficiencies," Journal of the European Economic Association, European Economic Association, vol. 16(2), pages 383-435.
    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.
    14. Paula Cordero Salas & Brian E. Roe & Brent Sohngen, 2018. "Additionality When REDD Contracts Must be Self-Enforcing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(1), pages 195-215, January.
    15. Cordero Salas, Paula, 2013. "Designing contracts for reducing emissions from deforestation and forest degradation," Policy Research Working Paper Series 6503, The World Bank.

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    More about this item

    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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