Rewards and punishments: Informal contracting through social preferences

Sylvain Chassang, Christian Zehnder

    Research output: Contribution to journalArticlepeer-review

    Abstract

    This paper develops a positive model of informal contracting in which rewards and punishments are not determined by an ex ante optimal plan but instead express the ex post moral sentiments of the arbitrating party. We consider a subjective performance evaluation problem in which a principal can privately assess the contribution of an agent to the welfare of a broader group. In the absence of formal contingent contracts, the principal chooses ex post transfers that maximize her social preferences. We characterize the incentives induced by the principal's preferences, contrast them with ex ante optimal contracts, and derive novel testable predictions about the way externalities are internalized in informal settings.

    Original languageEnglish (US)
    Pages (from-to)1145-1179
    Number of pages35
    JournalTheoretical Economics
    Volume11
    Issue number3
    DOIs
    StatePublished - Sep 1 2016

    Keywords

    • Informal contracts
    • fairness
    • intent-based justice
    • no punishment without guilt
    • social preferences
    • subjective performance evaluation

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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