Optimal Dynamic Contracting

Project summary

Project B02 studies long-term contractual relationships focusing on their enforcement and issues of ambiguity. Problems of enforceability and ambiguity both undermine the trust of market participants in contracts and therefore negate the contract’s purpose of providing incentives. Such problems are especially severe for dynamic relationships. Problems of enforcement are closely linked to issues of verification, which play an important role in labor and financial markets. Ambiguity and enforcement are naturally linked due to ambiguities in the enforcement of contracts through courts. Ambiguity goes, however, beyond enforcement problems as it is directly affects the belief formation of market participants.