2006 Reports
Reputations, relationships and the enforcement of incomplete contracts
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.
Subjects
Files
- econ_0506_20.pdf application/pdf 494 KB Download File
More About This Work
- Academic Units
- Economics
- Publisher
- Department of Economics, Columbia University
- Series
- Department of Economics Discussion Papers, 0506-20
- Published Here
- March 28, 2011
Notes
February 2006