More is less : why parties may deliberately write incomplete contracts / Maija Halonen-Akatwijuka, Oliver Hart.

Cambridge : Cambridge University Press, 2024.

1 online resource (25 pages) : digital, PDF file(s).

Cambridge elements. Elements in law, economics and politics.

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.

Title from publisher's bibliographic system (viewed on 30 Apr 2024).

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9781009396059 (ebook)
9781009475952 (hardback)
9781009396073 (paperback)

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