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Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In

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  • Oliver Hart
  • John Moore

Abstract

We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i. e. , these are “ruled out”. Ex post, they freely bargain over outcomes on the list, i. e. , the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not “ruled in”. A “loose” contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a “tight” contract (short list), even though this leads to ex post inefficiency.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2032.

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Date of creation: 2004
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Handle: RePEc:fth:harver:2032

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Cited by:
  1. Garrouste, Pierre & Saussier, Stephane, 2005. "Looking for a theory of the firm: Future challenges," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 58(2), pages 178-199, October.
  2. Sudipto Bhattacharya & Sergei Guriev, 2008. "Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes," Working Papers w0118, Center for Economic and Financial Research (CEFIR).
  3. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(1), pages 1-48, 02.
  4. Sophie Bade & Guillaume Haeringer & Ludovic Renou, 2006. "Bilateral Commitment," School of Economics Working Papers 2006-07, University of Adelaide, School of Economics.
  5. Bhattacharya, Sudipto & Guriev, Sergei, 2004. "Knowledge Disclosure, Patents and Optimal Organization of Research and Development," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4513, C.E.P.R. Discussion Papers.
  6. Shin, Dongsoo, 2008. "Information acquisition and optimal project management," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(4), pages 1032-1043, July.
  7. Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 05/117, Department of Economics, University of Bristol, UK.
  8. Chaserant, Camille, 2007. "Les fondements incomplets de l’incomplétude : Une revue critique de la théorie des contrats incomplets," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 83(2), pages 227-253, juin.
  9. Ricard Gil & Jordi Mondria, 2011. "Introducing managerial attention allocation in incentive contracts," SERIEs, Spanish Economic Association, Spanish Economic Association, vol. 2(3), pages 335-358, September.

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