What role do contracts play in long-term relationships? Very little, if any, according to the relational contract literature. It is not the contract that induces promise-keeping but the imposition of (or threat of imposing) relational or informal sanctions, such as suspension or termination of...

Under conventional contract theory, contracts may be efficient by protecting relationship-specific investment from hold-up in subsequent (re)negotiation over terms of trade. This paper demonstrates a different problem than hold-up when specific investment also provides significant private...

Under the doctrine of vicarious liability, a deep-pocket principal is often held responsible for a third-party harm caused by a judgment-proof agent's negligence. We analyze the incentive contract used by the principal to control the agent's behavior when a court can make an error in determining...