Question

discuss how importantly contracts and reputational concern can sometimes reduce incentjve problems and contracting costs?

Answer 1

Contracts are agreements between two parties which specifies the terms agreed between the concerned parties. It also specifies the clauses for violation since they are legally valid. Reputation is one of the most important factor in contracts since they can do a lot to enforce contracts but they also have their limitations, as in they cannot do everything to enforce contracts. Contractors and parties involved in contract mostly gain reputation through word of mouth or based on feedback given by the parties involved.

Reputation can greatly impact the incentives and the contracting costs involved as there is a fair deal of costs involved with the negative feedback or reputation an entity gains. For instance let us consider a builder who falters on meeting the committed dates provided the quality of work is acceptable. Interested parties will still prefer the builder but will use the failing commitments as a reason for negotiations thereby enforcing them to reducing the costs involved.

Hence reputational concern greatly impacts the incentives and contracting costs involved.