Double-Sided Moral Hazard, Efficiency Wages and Litigation

Gürtler, Oliver and Kräkel, Matthias (September 2007): Double-Sided Moral Hazard, Efficiency Wages and Litigation. SFB/TR 15 Discussion Paper No. 214

Abstract

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable 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 situations 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.

• Item Type: Paper (Discussion Paper)
• Keywords: double-sided moral hazard, efficiency wage, litigation, contest, settlement
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B4 - Die Gestaltung von Turnieren im Rahmen der Corporate Governance
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D86, J33, K41
• Language: English