Contractual exchange and the timing of payment

In this paper we stress the informal institutions that have evolved alongside formal contracts to mitigate agency costs. The timing of payment is a pervasive example of such an informal institution. The basic result of our analysis is that ex post payment is a rational institutional choice of buyers and sellers designed to control the significant transactions costs inherent in certain types of exchanges characterized by interpersonal differences in information. Moreover, the selection of a payment scheme allocates the roles of principal and agent, with the party having the greater likelihood of cheating becoming the agent.