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Why Parties May Deliberately Write Incomplete Contracts
Maija Halonen-Akatwijuka, University of Bristol
Oliver Hart, Harvard University
May 2024
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9781009396073
$23.00
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    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.

    Product details

    May 2024
    Paperback
    9781009396073
    34 pages
    228 × 151 × 3 mm
    0.07kg
    Available

    Table of Contents

    • 1. Introduction
    • 2. The model
    • 3. Is more less?
    • 4. Large gains in event
    • 5. Summary and conclusions
    • Appendix
    • References.
    Resources for
    Type
    Transcript
    Size: 14.52 KB
    Type: application/vnd.openxmlformats-officedocument.wordprocessingml.document
      Authors
    • Maija Halonen-Akatwijuka , University of Bristol
    • Oliver Hart , Harvard University