Skip to main content

Rewards and punishments: Informal contracting through social preferences

Author(s): Chassang, Sylvain; Zehnder, Christian

To refer to this page use:
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.
Publication Date: Sep-2016
Electronic Publication Date: 12-Sep-2016
Citation: Chassang, Sylvain, Zehnder, Christian. (2016). Rewards and punishments: Informal contracting through social preferences. Theoretical Economics, 11 (3), 1145 - 1179. doi:10.3982/TE2063
DOI: doi:10.3982/TE2063
ISSN: 1933-6837
Pages: 1145 - 1179
Type of Material: Journal Article
Journal/Proceeding Title: Theoretical Economics
Version: Final published version. This is an open access article.

Items in OAR@Princeton are protected by copyright, with all rights reserved, unless otherwise indicated.