More is Less

By Oliver Hart and Maija Halonen-Akatwijuka

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.

• Format: Paperback
• Language: English
• ISBN: 1009396072
• ISBN13: 9781009396073
• Release Date: May 2024
• Publisher: Cambridge University Press
• Length: 34 Pages
• Weight: 0.13 lbs.
• Dimensions: 0.1" x 6.0" x 9.0"