Double-Sided Moral Hazard , E ¢ ciency Wages and Litigation

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any veri…able performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may su¢ ce to make the… CONTINUE READING