Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 707: Contracts and Promises - An Approach to Pre-play Agreements

Topi Miettinen ()
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Topi Miettinen: SITE, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

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

JEL-codes: C72; C78; K12; Z13

26 pages, July 15, 2008

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