Endogenous Verifiability and Relational Contracting

Kvaløy, Ola; Olsen, Trond E.

doi:10.2139/ssrn.721861

Cited by 35 publications

(42 citation statements)

References 50 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Our paper (together with Kvaløy and Olsen, 2009) o¤ers a simple framework that is well suited for analyzing the relationship between trust-based informal contracts and legal institutions. The model can be extended to incorporate other legal variables such as litigation costs and alternative breach remedies.…”

Section: Resultsmentioning

confidence: 99%

“…In the …rst models dealing with the interaction between formal and informal contracting, such as Schmidt and Schnitzer (1995) and Baker, Gibbons and Murphy (1994), the level of contracting costs does not matter. 2 Recently, however, Sobel (2006), MacLeod (2007), Battigalli and Maggi (2008) and Kvaløy and Olsen (2009) have introduced models where contracting costs in ‡uence the interaction between legal enforcement and relational contracting. 3 But these papers assume symmetric information and do not deal with incentive problems due to unobservable e¤ort and moral hazard.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Incentive Provision When Contracting is Costly

Kvaløy

Olsen

2010

SSRN Journal

Self Cite

View full text Add to dashboard Cite

We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. We show that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts.We …nd that social surplus may be higher under costly relational contracting than under costless veri…able contracting, and show that there is not a monotonic relationship between contracting costs and incentive intensity. In particular we show that an increase in contracting costs may lead to higher-powered incentives. Moreover we formulate hypotheses about the relationship between legal systems and incentive provision, speci…cally the model predicts higher-powered incentives in common law than in civil law systems.

show abstract

Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Incentive Provision When Contracting is Costly

Kvaløy

Olsen

2010

SSRN Journal

Self Cite

View full text Add to dashboard Cite

show abstract

“…They show empirically that performance evaluations are more likely to be used for employees with shorter expected tenure. This paper also relates to the literature on endogenous contracts, like Kvaløy and Olsen (2009)…”

Section: Related Literaturementioning

confidence: 95%

Contracting with Subjective Evaluations and Communication

Lang

2012

SSRN Journal

View full text Add to dashboard Cite

Consider managers evaluating their employees' performance. Should managers justify their subjective evaluations? To answer this question, I study justifications: Suppose a manager's evaluation is private information. To justify her evaluation, she can gather additional information that allows the agent to partially cross-check the evaluation. I show that the manager justifies her evaluation if and only if the evaluation indicates bad performance. The justification assures the employee that the manager has not distorted the evaluation downwards. For good performances, however, the manager pays a constant high wage without justification.Empirical literature demonstrates that subjective evaluations discriminate poorly between good performances. This pattern was attributed to biased managers. I show that these effects occur in optimal contracts without any biased behavior.JEL classifications: D82, D86, J41, M52

show abstract

“…In that vein, Schwartz and Watson (2004), Doornik (2010) and Kvaløy and Olsen (2009) study the costs of writing contracts and its consequences on contract design. Those costs are nevertheless different from the enforcement costs highlighted above.…”

Section: Literature Reviewmentioning

confidence: 99%

A Theory of Contracts with Limited Enforcement

Martimort

Semenov

Stole

2016

Review of Economic Studies

View full text Add to dashboard Cite

Abstract. We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a longterm contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with backloaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. The public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances.

show abstract

Endogenous Verifiability and Relational Contracting

Cited by 35 publications

References 50 publications

Incentive Provision When Contracting is Costly

Incentive Provision When Contracting is Costly

Contracting with Subjective Evaluations and Communication

A Theory of Contracts with Limited Enforcement

Contact Info

Product

Resources

About