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Title:Double-sided moral hazard, efficiency wages and litigation PDF Logo
Authors:Gürtler, Oliver
Kräkel, Matthias
Issue Date:2007
Series/Report no.:Bonn econ discussion papers 2007,14
Abstract:We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifi- able performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this finding is rather robust. In particular, it holds for sit- uations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.
Subjects:double-sided moral hazard
efficiency wage
litigation contest
settlement
JEL:D86
J33
K41
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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