A self-enforcing contract requires that

Question

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A self-enforcing contract is one where both parties have incentives to fulfill their obligations because breaching the contract would result in a mutually bad outcome. In this case, both the employees and the employer would lose if they discontinued their contract, which creates the incentive for them to continue to fulfill their obligations. Option A is incorrect because employees gaining from opportunistic behavior would not create a self-enforcing contract as the employer would have no incentives to fulfill their obligations. Option B is incorrect because one party receiving the entire surplus would not create a mutually beneficial outcome and may lead to one party feeling exploited. Option D is incorrect because an equal division of the surplus does not necessarily create a self-enforcing contract, as one party may still have incentives to breach the contract.

A Self-Enforcing Contract Requires That