SSE/EFI Working Paper Series in Economics and Finance
Contracts and Promises - An Approach to Pre-play Agreements
Abstract: In line with the widely applied principle of just deserts,
we assume that the severity of the penalty on a contract offender increases
in the harm on the other. When this principle holds, the influence of the
efficiency of the agreement on the incentives to abide by it crucially
depends on whether actions are strategic complements or substitutes. With
strategic substitutes, there is a conflict between Pareto-efficiency and
the incentives to abide. The opposite tends to be true when actions are
strategic complements. The results are interpreted in the context of legal
contracts and in that of informal mutual promises.
Keywords: partnerships; contracts; pre-play communication; legal enforcement; social norms; guilt; (follow links to similar papers)
JEL-Codes: C72; C78; K12; Z13; (follow links to similar papers)
26 pages, July 15, 2008
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