The Threat of Exclusion and Implicit Contracting
Journal
Management Science
ISSN
0025-1909
ISSN-Digital
1526-5501
Type
journal article
Date Issued
2016-11-02
Author(s)
Abstract
Implicit contracts can mitigate moral hazard in labor, credit and product markets. The enforcement mechanism underlying an implicit contract is the threat of exclusion: the agent fears that he will lose future income if the principal breaks off the relationship. This threat may be very weak in environments where an agent can appropriate income-generating resources provided by the principal. For example, in credit markets with weak creditor protection borrowers may be able to appropriate borrowed funds and generate investment income without requiring further loans. We examine implicit contracting in a lending experiment where the threat of exclusion is exogenously varied. We find that weak exclusion undermines implicit contracting: it leads to a more frequent breakdown of credit relationships as well as to smaller loans.
Language
English
Keywords
Relational contracts
Starting small
Debt enforcement.
HSG Classification
contribution to scientific community
Refereed
No
Publisher
INFORMS
Publisher place
Hanover, Md.
Volume
63
Number
12
Subject(s)
Contact Email Address
martin.brown@unisg.ch
Eprints ID
155108
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open.access
Name
14_07_Brown et al_The Threat of Exclusion and Relational Contracting.pdf
Size
1.55 MB
Format
Adobe PDF
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