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It has become fashionable in recent years to level charges of abuse at a variety of social welfare programs. Unemployment insurance and certain disability compensation programs come to mind as targets of a barrage of criticism based on inherent work disincentives and sloppy administration. No doubt there is an element of truth in many of the criticisms. However, it is one thing to allege the existence of disincentives and quite another to predict the ways in which they will alter observable behavior. This paper attempts the latter task. Numerous authors have noted that the incentives imbedded in any contract are a function of the contractual provisions and enforcement. By its very nature, a contract governing exchange between two parties constrains their behavior. Each contractual provision or restriction attempts to limit the responses of both parties. However, if the restrictions are not perfectly enforced, the constraints are not binding, which lowers the costs of contractual violations. Depending upon the type of contract, these violations may be labeled default, cheating, shirking, fraud, negligence, or moral hazard. As a case in point consider the analysis by Armen Alchian and Harold Demsetz (1972) of the possibility that individuals might shirk contractual responsibilities if benefits exceeded the costs. Recall that the theory of shirking was originally couched in terms of a utility-maximizing employee's laborleisure tradeoff. Labor time yields a pecuniary reward in the form of income. Leisure may be thought of as its own reward, or as the time devoted to the individual's other desired pursuits. Given a time constraint, an individual will allocate his labor to equate the gains from income with the gains from leisure at the margin. If labor rewards are not perfectly correlated with productive effort, then the incentive to produce is diminished-shirking results. If shirking could be costlessly detected, neither party to a contract would have an incentive to shirk, since the full costs of shirking could be brought to bear on the guilty party through renegotiations of the terms of trade. However, if detecting shirking through some monitoring mechanism is costly, the guilty party will not generally be forced to bear the full costs of his behavior.' Monitoring will only be undertaken so long as the marginal gains from reduced shirking equal or exceed the marginal costs of detection. Less-than-perfect monitoring implies some shirking incentives remain. Strickly speaking, shirking may be defined as the act of seeking to avoid performance of contractual duty. Although Alchian and Demsetz developed the theory to explain organizations of employer-employee relationships, it is clear that it can be applied to any contract. Their results are now well known: contractual violations are an increas*University of Delaware and Purdue University, respectively. We are indebted to the Carthage Foundation and the Krannert Graduate School at Purdue University for financial support. We thank numerous colleagues at the University of Delaware and Purdue University for intellectual support. In particular, thanks must go to Jack Barron, James Chelius, Robert Clower, and an anonymous referee for their helpful comments on earlier drafts. While much of the data used for testing came from OWCP, the FAA, and lengthy interviews with individuals in the air traffic control industry, none of these groups encouraged or funded this study. The views expressed here are solely our own. 'The individual still adjusts at his labor-leisure margin. Positive detection costs imply that each person will be induced to take more leisure, because the effect of relaxing on his realized (reward) rate of substitution between output and leisure will be less than the effect on the true rate of substitution. His realized cost of leisure will fall more than the true cost of leisure, so he 'buys' more leisure (i.e., more nonpecuniary reward) (Alchian and Demsetz, p. 780).
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