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dc.contributor.authorKvaløy, Ola
dc.contributor.authorOlsen, Trond E.
dc.date.accessioned2006-07-13T07:40:07Z
dc.date.available2006-07-13T07:40:07Z
dc.date.issued2004-11
dc.identifier.issn1500-4066
dc.identifier.urihttp://hdl.handle.net/11250/163731
dc.description.abstractWe analyze a repeated principal-agent trust game where the principal makes a specific investment by paying the agent up-front, expecting an agreed upon quality level in return. The verifiability of the agent’s action is endogenously determined by the principal’s investment in writing an explicit contract. Since verification is not certain, explicit contracting is insufficient, and the parties must engage in relational (implicit) contracting. First, we analyze how variations in trust (the discount factor) affect the contract equilibrium. Interestingly, we find that more trust may lead to lower levels of specific investments. This occurs when the surplus from trust is realized mainly through lower explicit contract costs. Second, we extend the literature on the interaction between explicit and relational governance by analyzing how variations in verification technology affect contract equilibrium. Since verification technology determines the cost necessary to achieve a given probability of verification, this analysis can also explain interesting aspects of legal systems.en
dc.format.extent287786 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoengen
dc.publisherNorwegian School of Economics and Business Administration. Department of Finance and Management Scienceen
dc.relation.ispartofseriesDiscussion paperen
dc.relation.ispartofseries2004:20en
dc.subjecttrusten
dc.subjectrelationship specific investmentsen
dc.subjectrelational contractsen
dc.subjectendogenous verifiabilityen
dc.titleEndogenous verifiability in relational contractingen
dc.typeWorking paperen


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