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Complexity and Contract

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  • W. Bentley Macleod

Abstract

[eng] It is well known that contract incompleteness can arise from the impossibility of planning for all future contingencies in a relationship (e.g. Williamson (1975)). In this paper it is shown that whether or not such incompleteness constrains the efficiency of the contract is very sensitive to assumptions concerning the timing of the resolution of uncertainty. It is shown that when agents must respond to an unforeseen contingency before being able to renegotiate the contract, then contract complexity is a binding constraint, a case that is called ex post hold-up. Secondly, it is suggested that the amount of multitasking can provide a measure of contract complexity. When complexity is low, contingent contracting is efficient, while subjective performance evaluation is more efficient when complexity is high. In this case the optimal contract for ex post hold-up is based upon the ability of humans to make subjective judgments that are in some cases more informative than explicit performance measures. Moreover, the efficiency of the contract is not sensitive to human errorperse, but is an increasing function of the correlation in judgments between the contracting parties. [fre] Il est communément admis que l'incomplétude des contrats peut provenir de l'impossibilité de se préparer à toutes les contingences futures d'une relation contractuelle (cf. Williamson 1975). Dans ce papier, nous montrons que le fait qu'une telle incomplétude contraigne, ou non, l'efficacité contractuelle est très dépendant des hypothèses concernant le processus de traitement de l'incertitude. Nous montrons que, quand les agents doivent répondre à une contingence imprévue avant d'être capables de renégocier le contrat, la complexité contractuelle est alors une contrainte sans issue. Ce cas est celui du "hold up ex post". Deuxièmement, il est suggéré que l'importance des activités multi-tâches peut constituer une mesure de la complexité contractuelle. Quand la complexité est faible, un contrat contingent est efficace. Alors qu'une évaluation subjective des performances des contractants est plus efficace quand la complexité est élevée. Dans ce dernier cas, le contrat optimal pour prévenir le hold up ex post est fondé sur l'aptitude des êtres humains à produire des jugements subjectifs qui sont dans certains cas plus appropriés que des mesures explicites des performances. De plus, l'efficacité du contrat n'est pas sensible à l'erreur humaine en elle-même, mais est une fonction croissante de la corrélation des jugements entre les parties contractantes.

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File URL: http://dx.doi.org/10.3406/rei.2000.1044
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File URL: http://www.persee.fr/articleAsPDF/rei_0154-3229_2000_num_92_1_1044/rei_0154-3229_2000_num_92_1_1044.pdf?mode=light
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Bibliographic Info

Article provided by Programme National Persée in its journal Revue d'économie industrielle.

Volume (Year): 92 (2000)
Issue (Month): 1 ()
Pages: 149-178

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Handle: RePEc:prs:recind:rei_0154-3229_2000_num_92_1_1044

Note: DOI:10.3406/rei.2000.1044
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Web page: http://www.persee.fr/web/revues/home/prescript/revue/rei

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Cited by:
  1. Alan Schwartz & Joel Watson, . "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  2. Pierpaolo Battigalli & Giovanni Maggi, 2003. "Costly Contracting in a Long-Term Relationship," Working Papers 249, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation 05/117, Department of Economics, University of Bristol, UK.

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