Contracts as Threats: on a Rationale For Rewarding A while Hoping For B

Iossa ElisabettaSpagnolo Giancarlo
CEIS Research Paper
In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non) implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.
Number: 147
Keywords: Implicit contracts; incomplete contracts; repeated games;
JEL codes: C73 - D86
Date: Wednesday, September 30, 2009
Revision Date: Wednesday, September 30, 2009