Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94007
Authors: 
Gürtler, Oliver
Kräkel, Matthias
Year of Publication: 
2007
Series/Report no.: 
SFB/TR 15 Discussion Paper 214
Abstract: 
We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable 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 situations 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
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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