Contracts and Promises – An Approach to Pre-playAgreements

In line with the widely applied principle of just deserts, we assume that the severityof the penalty on a contract offender increases in the harm on the other. Whenthis principle holds, the influence of the efficiency of the agreement on the incentivesto abide by it crucially depends on whether actions are strategic complements orsubstitutes. With strategic substitutes, there is a conflict between Pareto-efficiencyand the incentives to abide. The opposite tends to be true when actions are strategiccomplements. The results are interpreted in the context of legal contracts andin that of informal mutual promises.