More is Less: Why Parties May Deliberately Write Incomplete Contracts (Elements in Law, Economics and Politics)
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- Synopsis
- Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on 'contracts as reference points'. Including a contingency of the form, 'The buyer will require a good in event E', has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract is strictly superior to a contingent contract. If parties have different views about the division of surplus, an incomplete contract can be superior if including a contingency would lead to divergent reference points.
- Copyright:
- 2024
Book Details
- Book Quality:
- Publisher Quality
- ISBN-13:
- 9781009396097
- Related ISBNs:
- 9781009396073, 9781009396073
- Publisher:
- Cambridge University Press
- Date of Addition:
- 05/28/24
- Copyrighted By:
- Maija Halonen-Akatwijuka and Oliver Hart
- Adult content:
- No
- Language:
- English
- Has Image Descriptions:
- No
- Categories:
- Nonfiction, Business and Finance
- Submitted By:
- Bookshare Staff
- Usage Restrictions:
- This is a copyrighted book.