Rigidity, Discretion, and the Costs of Writing Contracts
In this paper we model contract incompleteness "from the ground up," as arising endogenously from the costs of describing the environment and the parties' behavior. Optimal contracts may exhibit two forms of incompleteness: discretion, meaning that the contract does not specify the parties' behavior with sufficient detail; and rigidity, meaning that the parties' obligations are not sufficiently contingent on the external state. The model sheds light on the determinants of rigidity and discretion in contracts, and yields rich predictions regarding the impact of changes in the exogenous parameters on the degree and form of contract incompleteness. (JEL D23, D8, L14)
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Volume (Year): 92 (2002)
Issue (Month): 4 (September)
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- Nabil Al-Najjar & Luca Anderlini & Leonardo Felli, 2002.
LSE Research Online Documents on Economics
3578, London School of Economics and Political Science, LSE Library.
- Nabil J Al-Najjar & Luca Anderlini & Leonardo Felli, 2002. "Unforeseen Contingencies," STICERD - Theoretical Economics Paper Series 431, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Al-Najjar, Nabil I. & Anderlini, Luca & Felli, Leonardo, 2002. "Unforeseen Contingencies," CEPR Discussion Papers 3271, C.E.P.R. Discussion Papers.
- Allen, F. & Gale, D., 1990.
"Measurement Distortion And Missing Contingencies In Optimal Contracts,"
Weiss Center Working Papers
26-90, Wharton School - Weiss Center for International Financial Research.
- Allen, Franklin & Gale, Douglas, 1992. "Measurement Distortion and Missing Contingencies in Optimal Contracts," Economic Theory, Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 1-26, January.
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