Formal and Informal Contracting: Theory and Evidence

Abstract

In this article, we review the emerging economic literature on formal and informal contracting. Two patterns emerge from this literature. First, the use of informal contracts to complement formal ones is widespread, both within and between firms. Second, informal contracts are limited by the expectation of future collaborations between the parties. Our review suggests that there are significant opportunities for further integrated research in economics, law, and social sciences to enhance our understanding of the interaction between formal and informal contracting within firms, as well as in nonfirm organizations.