More is Less: Why Parties May Deliberately Write Incomplete Contracts (Elements in Law, Economics and Politics)
by: Maija Halonen-Akatwijuka (Author),Oliver Hart(Author)
Publisher:Cambridge University Press
Publication Date: 23 May 2024
Language:English
Print Length:34 pages
ISBN-10:1009396072
ISBN-13:9781009396073
Book Description
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 ', has a benefit and a cost. The benefit is that if occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in can hinder (re)negotiation in states outside. 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.
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