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Double-Sided Moral Hazard, Efficiency Wages and Litigation

Author

Listed:
  • Gürtler, Oliver
  • Kräkel, Matthias
Abstract
We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifi- able performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this finding is rather robust. In particular, it holds for sit- uations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.

Suggested Citation

  • Gürtler, Oliver & Kräkel, Matthias, 2007. "Double-Sided Moral Hazard, Efficiency Wages and Litigation," Bonn Econ Discussion Papers 14/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:142007
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    References listed on IDEAS

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    Cited by:

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    4. Yu, Xinning & Lan, Yanfei & Zhao, Ruiqing, 2021. "Strategic green technology innovation in a two-stage alliance: Vertical collaboration or co-development?," Omega, Elsevier, vol. 98(C).

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    More about this item

    Keywords

    double-sided moral hazard; efficiency wage; litigation contest; settlement;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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