More is Less: Why Parties May Deliberately Write Incomplete Contracts

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Maija Halonen-Akatwijuka (University of Bristol) Oliver Hart (Harvard University)

More is Less

Why Parties May Deliberately Write Incomplete Contracts

Maija Halonen-Akatwijuka (University of Bristol), Oliver Hart (Harvard University)

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English

Cambridge University Press
23 May 2024

Comparative politics; Economics; Contract law

Series: 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 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.

By: Maija Halonen-Akatwijuka (University of Bristol), Oliver Hart (Harvard University)
Imprint: Cambridge University Press
Country of Publication: United Kingdom
Dimensions: Height: 228mm, Width: 151mm, Spine: 3mm
Weight: 70g
ISBN: 9781009396073
ISBN 10: 1009396072
Series: Elements in Law, Economics and Politics
Pages: 34
Publication Date: 23 May 2024
Audience: General/trade , ELT Advanced
Format: Paperback
Publisher's Status: Active

1. Introduction; 2. The model; 3. Is more less?; 4. Large gains in event; 5. Summary and conclusions; Appendix; References.