Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/33641
Authors: 
MacLeod, W. Bentley
Year of Publication: 
2006
Series/Report no.: 
IZA Discussion Papers 1978
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.
Subjects: 
contract
law and economics
reputation
repeated games
incomplete contracts
transactions costs
institutional economics
contract enforcement
JEL: 
D86
K12
C7
O17
Document Type: 
Working Paper

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