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 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 2018 11:17
URI: https://www.alexandria.unisg.ch/publications/155108

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Citation

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

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https://www.alexandria.unisg.ch/id/eprint/155108
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