AbstractWe propose a model of equilibrium contracting between two agents who are "boundedly rational" in the sense that they face time-costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less up-front deliberation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14654.
Date of creation: Jan 2009
Date of revision:
Note: CF IO LE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-17 (All new papers)
- NEP-BEC-2009-01-17 (Business Economics)
- NEP-CTA-2009-01-17 (Contract Theory & Applications)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mathias Dewatripont & Patrick Bolton, 2005.
ULB Institutional Repository
2013/9543, ULB -- Universite Libre de Bruxelles.
- Hardman Moore, John & Hart, Oliver, 1985.
"Incomplete Contracts and Renegotiation,"
CEPR Discussion Papers
60, C.E.P.R. Discussion Papers.
- Patrick Bajari & Steven Tadelis, 1999.
"Incentives versus Transaction Costs: A Theory of Procurement Contracts,"
99029, Stanford University, Department of Economics.
- Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
- Al-Najjar, Nabil I. & Anderlini, Luca & Felli, Leonardo, 2002.
CEPR Discussion Papers
3271, C.E.P.R. Discussion Papers.
- Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
- Grossman, Sanford J & Hart, Oliver, 1985.
"The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration,"
CEPR Discussion Papers
70, C.E.P.R. Discussion Papers.
- Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
- Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
- Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
- Surajeet Chakravarty & W. Bentley MacLeod, 2008.
"Contracting in the Shadow of the Law,"
NBER Working Papers
13960, National Bureau of Economic Research, Inc.
- Anderlini, Luca & Felli, Leonardo, 2001.
"Costly Bargaining and Renegotiation,"
Econometric Society, vol. 69(2), pages 377-411, March.
- Anderlini, L. & Felli, L., 1999. "Costly bargaining and renegotiation," Discussion Paper Series In Economics And Econometrics 9910, Economics Division, School of Social Sciences, University of Southampton.
- Luca Anderlini & Leonardo Felli, 1999. "Costly Bargaining and Renegotiation," CESifo Working Paper Series 213, CESifo Group Munich.
- Anderlini, Luca & Felli, Leonardo, 1994.
"Incomplete Written Contracts: Undescribable States of Nature,"
The Quarterly Journal of Economics,
MIT Press, vol. 109(4), pages 1085-1124, November.
- Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
- Carsten Bienz & Uwe Walz, 2010.
"Venture Capital Exit Rights,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 19(4), pages 1071-1116, December.
- Dye, Ronald A, 1985. "Costly Contract Contingencies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-50, February.
- Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
- Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
- Conlisk, John, 1988. "Optimization cost," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 213-228, April.
- Kaplan, Steven N. & Martel, Frederic & Stromberg, Per, 2007. "How do legal differences and experience affect financial contracts?," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 273-311, July.
- Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, vol. 92(4), pages 798-817, September.
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
- Radner, Roy & Rothschild, Michael, 1975. "On the allocation of effort," Journal of Economic Theory, Elsevier, vol. 10(3), pages 358-376, June.
- Daniel C. Hardy, 2013. "Bank Resolution Costs, Depositor Preference, and Asset Encumbrance," IMF Working Papers 13/172, International Monetary Fund.
- Patrick Bolton & Antoine Faure-Grimaud, 2009. "Thinking Ahead: The Decision Problem," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1205-1238.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.