Endogenous Verifiability and Relational Contracting

摘要

For contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract. The strict requirements of verifiability make it costly, if not impossible, for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court. A way out is then to rely on self-enforcing relational contracts. Through repeated transactions the parties can make it costly for each other to breach the contract, by letting breach ruin future trade. But the self-enforcing range of contracts is limited, so the court's ability to enforce a contract is not without consequence for the contracting parties. If possible, the parties may thus have incentives to take costly actions that affect the ability of the court.