Scandinavian Working Papers in Economics

UiS Working Papers in Economics and Finance,
University of Stavanger

No 2012/16: Incentive provision when contracting is costly

Ola Kvaløy () and Trond Olsen
Additional contact information
Ola Kvaløy: UiS, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Trond Olsen: NHH, Postal: Norwegian School of Economics

Abstract: We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. The analysis shows that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We show that there is not a monotonic relationship between contracting costs and incentive intensity, and 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.

Keywords: .

JEL-codes: A10

47 pages, September 19, 2012

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uis_wps_2012_16_kvaloy_olsen.pdf PDF-file

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