Reputations, Relationships and the Enforcement of Incomplete Contracts

No 1978, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: institutional economics; transactions costs; incomplete contracts; repeated games; reputation; law and economics; contract; contract enforcement (search for similar items in EconPapers)
JEL-codes: C7 D86 K12 O17 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2006-02
New Economics Papers: this item is included in nep-bec, nep-dev and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published - published in: Journal of Economic Literature, 2007, 45(3), 595-628

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Working Paper: Reputations, Relationships and the Enforcement of Incomplete Contracts (2006)
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