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Incentive provision when contracting is costly

Kvaløy, Ola; Olsen, Trond E.
Working paper
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URI
http://hdl.handle.net/11250/164143
Date
2010-08
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  • Discussion papers (FOR) [529]
Abstract
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 find that social surplus may be higher under costly relational contracting than under costless verifiable 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, specifically the model predicts higher-powered incentives in

common law than in civil law systems.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2010:10

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