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Explaining Incomplete Contracts as the Result of Contract-Reading Costs

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  • Rasmusen Eric Bennett

    (Indiana University/Harvard Law School)

Abstract

Much real-world contracting involves finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.

Suggested Citation

  • Rasmusen Eric Bennett, 2001. "Explaining Incomplete Contracts as the Result of Contract-Reading Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-39, October.
    • Handle: RePEc:bpj:bejeap:v:advances.1:y:2001:i:1:n:2
    DOI: 10.2202/1538-0637.1000
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    Cited by:

    1. Eric Rasmusen, 2004. "Getting Carried Away in Auctions as Imperfect Value Discovery," Industrial Organization 0409001, University Library of Munich, Germany.
    2. D׳Agostino, Elena & Seidmann, Daniel J., 2016. "Protecting buyers from fine print," European Economic Review, Elsevier, vol. 89(C), pages 42-54.
    3. Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 39-53, October.
    4. M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO.
    5. Rasmusen Eric Bennett, 2006. "Strategic Implications of Uncertainty over One's Own Private Value in Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-22, November.
    6. Edward Kane, 2007. "Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 399-409, December.

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