Contracting when enforcement is weak: evidence from an audit study
File(s)rfae019.pdf (1.26 MB)
Published version
Author(s)
Iyer, Rajkamal
Schoar, Antoinette
Type
Journal Article
Abstract
How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premia to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40% of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases renegotiation fails.
Date Issued
2024-09-01
Date Acceptance
2024-07-12
Citation
Review of Finance, 2024, 28 (5), pp.1513-1536
ISSN
1382-6662
Publisher
Oxford University Press (OUP)
Start Page
1513
End Page
1536
Journal / Book Title
Review of Finance
Volume
28
Issue
5
Copyright Statement
© The Author(s) 2024. Published by Oxford University Press on behalf of the European Finance Association.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
License URL
Identifier
https://doi.org/10.1093/rof/rfae019
Publication Status
Published
Article Number
rfae019
Date Publish Online
2024-07-13