Giorgio Zanarone
Colegio Universitario de Estudios Financieros, Madrid


(Monday, 18th May 2009)

Title : The interaction between formal and informal contracts

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Formal contracts are a powerful tool for exchange, because they are backed by the power of the State and, therefore, allow parties to strongly commit to their agreements. However, formal contracts are also costly, because they must be enforced by third parties, such as courts, who are alien to the contractual relationship. Informal contracts, which are enforced by the parties themselves, can reduce these costs, but, because they are not backed by the power of the State, they also create new opportunities for non-compliance. Hence, depending on the technology, the legal system, and the nature of the relationship, it may be optimal to use formal contracts, informal contracts, or a blend of the two. Based on classic and recent theories, empirical evidence, and case studies, this workshop will discuss the interaction between formal and informal contracts, both within and between firms, touching upon diverse aspects of organizational design like incentive contracts, decision rights, and the boundaries of firms. The workshop will also discuss some methodological issues in the empirical study of informal contracts, and highlight promising paths for future research.

Bibliographical references :

KLEIN, B., (2000), “The Role of Incomplete Contracts in Self-Enforcing Relationships,” Revue d’Economie Industrielle 92: 67-80.

BAKER, G., R. GIBBONS, and K. J. MURPHY, (2002), “Relational Contracts and the Theory of the Firm,” Quarterly Journal of Economics 117: 39-84.

ZANARONE, G., (2009a), “Fiat without Authority under Vertical Integration,” unpublished manuscript.

ARRUÑADA, B., L. GARICANO, and L. VÁZQUEZ, (2001), “Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution,” Journal of Law, Economics & Organization 17: 256-283.

CORTS, K., and J. SINGH, (2004), “The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling,” Journal of Law, Economics & Organization 20: 230-260.

GIL, R., and J. MARION, (2009), “The Role of Repeated Interactions, Self-Enforcing Agreements and Relational (Sub)Contracting: Evidence from California Highway Procurement Auctions,” unpublished manuscript.

ZANARONE, G., (2009b), “The Role of Decision Rights in Incomplete Contracts: Lessons from Automobile Franchising,” unpublished manuscript.