This paper shows how the fear of signaling distrust can endogenously lead to incomplete contractual agreements. According to standard results in contract theory an optimal incentive contract should be conditional on all verifiable information containing statistical information about an agent's action or type. Most real world contracts, however, condition only on few contingencies and often no explicit contract is signed at all. This paper argues that the proposal of a sophisticated complete contract including fines for misbehavior and other explicit incentives signals distrust to the partner. A trustworthy partner would choose the desired action anyway. Insisting on explicit contractual incentives thus means that the partner's trustworthiness is called into question. Thus if it is important for the relation that an agent believes to be trusted, a principal may prefer to propose an incomplete contract rather than to signal her distrust by proposing a complete contract. Asymmetric information about how much one partner trusts the other one leads thus endogenously to contractual incompleteness for strategic reasons.

We study the evolution of preferences under perfect and almost perfect observability in symmetric 2-player games. We demonstrate that if nature can choose from a sufficiently general preference space, i.e. preferences over outcomes that may depend on the opponent's preference-type, then, in most games, only discriminating preferences (treating different types of opponents differently in the same situation) can be evolutionary stable and some discriminating types are stable in a very strong sense in all games. We use these discriminating types to show that any symmetric outcome which gives players more than their minmax value in material payoffs (fitness) can be seen as equilibrium play of a player population with such strongly stable preferences.

This paper studies the evolution and co-evolution of both characteristics of reciprocity - the willingness to reward friendly behavior and the willingness to punish hostile behavior. Firstly, both preferences for rewarding and preferences for punishing can survive in evolution provided individuals interact within separate groups. This holds even with randomly formed groups and even when individual preferences are unobservable. Secondly, preferences for rewarding survive only in coexistence with self-interested preferences, but preferences for punishing tend either to vanish or to dominate the population entirely. Finally, the evolution of preferences for rewarding and the evolution of preferences for punishing influence each other decisively. The existence of rewarders enhances the evolutionary success of punishers, but punishers crowd out rewarders.

The separation of the legislative, executive and judiciary powers is a key principle in most democratic constitutions. We analyze the costs and benefits of separating legislature and executive in an incomplete contracts model: The executive can decide to implement public projects. Under separation of powers, the legislature sets up a decision-making framework that leaves the executive with the residual decision-making rights. Separation of powers is the more beneficial, the larger the danger of extreme policy preferences of the residual political decision-maker.