TY  - JOUR
AU  - Falk,Armin
AU  - Huffman,David
AU  - MacLeod,W. Bentley
TI  - Institutions and Contract Enforcement
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13961
PY  - 2008
Y2  - April 2008
UR  - http://www.nber.org/papers/w13961
L1  - http://www.nber.org/papers/w13961.pdf
N1  - Author contact info:
Armin Falk
Department of Economics
University of Bonn
Adenauerallee 24-42, 53113 Bonn
E-Mail: armin.falk@uni-bonn.de

David Huffman
Department of Economics
500 College Avenue
Swarthmore, PA 19081-1397
E-Mail: dhuffma1@swarthmore.edu

W. Bentley MacLeod
Department of Economics
Columbia University
420 West 118th Street, MC 3308
New York, NY 10027
Tel: 212/854-4212
Fax: 212/854-4782
E-Mail: bentley.macleod@columbia.edu
AB  - We provide evidence on how two important types of institutions -- dismissal barriers, and bonus pay -- affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
ER  -