Working Papers Abstract
249.Costly Contracting in a Long-Term Relationshipby Pierpaolo Battigalli (Bocconi University, IEP and IGIER) and Giovanni Maggi (Princeton University)
We examine a model of contracting where parties interact repeatedly and can contractat any point in time, but writing enforceable contracts is costly. A contract candescribe contingencies and actions at a more or less detailed level, and the cost of writinga contract is proportional to the amount of detail. We consider both formal (externallyenforced) and informal (self-enforcing) contracts. The presence of writing costs has importantimplications both for the optimal structure of formal contracts, particularly thetradeo. between contingent and spot contracts, and for the interaction between formaland informal contracting. Our model sheds light on these implications and generates arich set of predictions about the determinants of the optimal mode of contracting.
JEL classification: D23, C73.
KEYWORDS: writing costs, contingent vs spot contracting, formal vs informal contracts.
Download PDF Document
IGIER - Università Bocconi