Contracting Without a Plan: A Theory of Informal Justice

73 Pages Posted: 26 Mar 2013 Last revised: 6 May 2014

See all articles by Sylvain Chassang

Sylvain Chassang

New York University (NYU) - Department of Economics

Christian Zehnder

University of Lausanne

Date Written: February 8, 2014

Abstract

This paper develops a novel 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 an arbitrating party. Specifically, we consider a third party arbitrator mediating a one-shot relationship between two players, one of whom can exert an externality on the other. Importantly, formal contracts are not available and the arbitrator chooses transfers to maximize her ex post social preferences. We characterize the implicit incentive schemes induced by the arbitrator's preferences, contrast them with ex ante optimal contracts, and identify novel qualitative predictions about the way externalities are internalized in informal settings.

Keywords: informal contracts, incomplete contracts, social preferences, heuristics, arbitration, third party punishment

Suggested Citation

Chassang, Sylvain and Zehnder, Christian, Contracting Without a Plan: A Theory of Informal Justice (February 8, 2014). Economic Theory Center Working Paper No. 049-2013. Available at SSRN: https://ssrn.com/abstract=2234023 or http://dx.doi.org/10.2139/ssrn.2234023

Sylvain Chassang (Contact Author)

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

Christian Zehnder

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

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