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Globally Incentives-Compatible Contracts Under Weak Third Party Enforcement

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  • Raul V. Fabella

    (School of Economics, University of the Philippines Diliman)

Abstract

We explore how the structure of incentives contracts adjusts to the creation of quasi-rents by the delivery of certain types of contract obligations under weak third party enforcement (TPE). The situation invites quasi-rent appropriation by some contractor. We focus on possible ex-post opportunism by the principal. We propose the concept of globally incentives compatible (GIC) contracts, where no contractor has the incentive to deviate ex-post from the obligations set ex-ante in the contract. We model optimal appropriation by the principal and the response of the agent when the contract is not GIC. The conditions that guarantee GIC for principal-agent the incentives contracts under weak TPE are investigated.

Suggested Citation

  • Raul V. Fabella, 2005. "Globally Incentives-Compatible Contracts Under Weak Third Party Enforcement," UP School of Economics Discussion Papers 200507, University of the Philippines School of Economics.
    • Handle: RePEc:phs:dpaper:200507
    as

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    File URL: http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/125/123
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    References listed on IDEAS

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