The Threat of Exclusion and Implicit Contracting

Item Type	Journal paper
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.
Authors	Brown, Martin & Serra-García, Marta
Journal or Publication Title	Management Science
Language	English
Keywords	Relational contracts, Starting small, Debt enforcement.
Subjects	business studies economics finance
HSG Classification	contribution to scientific community
Refereed	No
Date	2 November 2016
Publisher	INFORMS
Place of Publication	Hanover, Md.
Volume	63
Number	12
ISSN	0025-1909
ISSN-Digital	1526-5501
Publisher DOI	https://doi.org/10.1287/mnsc.2016.2572
Contact Email Address	martin.brown@unisg.ch
Depositing User	Prof. Dr. Martin Brown
Date Deposited	04 Jul 2011 09:36
Last Modified	20 Jul 2022 17:06
URI:	https://www.alexandria.unisg.ch/publications/155108

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Brown, Martin & Serra-García, Marta (2016) The Threat of Exclusion and Implicit Contracting. Management Science, 63 (12). ISSN 0025-1909

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