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Title:The interaction of explicit and implicit contracts: A signaling approach PDF Logo
Authors:Gürtler, Marc
Gürtler, Oliver
Issue Date:2012
Series/Report no.:Working papers, Institut für Finanzwirtschaft, Technische Universität Braunschweig IF38V1
Abstract:We analyze the interaction of explicit and implicit contracts in a model with selfish and fair principals. Fair principals are willing to honor implicit agreements, whereas selfish principals are not. Principals are privately informed about their types. We investigate a separating equilibrium in which principals reveal their type through the contract o er to the agent. If this equilibrium is played, explicit and implicit contracts are substitutes. Since the agent learns the principal's type, a selfish principal has to rely on explicit incentives. A fair principal, by contrast, can effectively induce implicit incentives and hence does not need to use explicit incentives. Interestingly, if a selfish principal can rely on more effective explicit incentives, a fair principal becomes more likely to be able to separate from the selfish type and, hence, to make better use of implicit incentives. In this sense, there is a strategic complementarity between explicit and implicit incentives.
Subjects:explicit contracts
implicit contracts
separating equilibrium
substitutes
strategic
complementarity
JEL:D82
D86
M52
Persistent Identifier of the first edition:doi:10.2139/ssrn.2031582
Document Type:Working Paper
Appears in Collections:Working Paper Series, Institut für Finanzwirtschaft, TU Braunschweig

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