Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/147346
Authors: 
Brown, Martin
Serra-Garcia, Marta
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6092
Abstract: 
Implicit contracts can mitigate moral hazard in labor, credit and product markets. The enforcement mechanism underlying an implicit contract is the threat of exclusion: the agent fears that he will lose future income if the principal breaks off the relationship. This threat may be very weak in environments where an agent can appropriate income-generating resources provided by the principal. For example, in credit markets with weak creditor protection borrowers may be able to appropriate borrowed funds and generate investment income without requiring further loans. We examine implicit contracting in a lending experiment where the threat of exclusion is exogenously varied. We find that weak exclusion undermines implicit contracting: it leads to a more frequent breakdown of credit relationships as well as to smaller loans.
Subjects: 
Economics: microeconomic behavior
behavior and behavioral decision making
Finance: corporate finance
implicit contracting
JEL: 
C73
G21
O16
F21
F34
Document Type: 
Working Paper

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