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Endogenous Incomplete Contracts: A Bargaining Approach

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  • Lutz-Alexander Busch
  • Ignatius Horstmann

Abstract

In this paper we argue that, by modelling the contracting process as a bargaining game, one can endogenize the choice between complete and incomplete contracts. This point is demonstrated within a stylized model in which agents can allocate an endowment stream either via a once-for-all bargain over the entire stream--a long-term contract--or through a series of bargaining rounds--a short-term contract. Within this structure, short-term contracts arise as equilibrium outcomes under very general conditions, because a short-term contract implies reduced bargaining costs for one of the agents. In essence, reduced 'transaction costs' produce a short-term contract.

Suggested Citation

  • Lutz-Alexander Busch & Ignatius Horstmann, 1999. "Endogenous Incomplete Contracts: A Bargaining Approach," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 956-975, August.
  • Handle: RePEc:cje:issued:v:32:y:1999:i:4:p:956-975
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Busch, Lutz-Alexander & Horstmann, Ignatius J., 2002. "The game of negotiations: ordering issues and implementing agreements," Games and Economic Behavior, Elsevier, vol. 41(2), pages 169-191, November.
    2. repec:spr:grdene:v:23:y:2014:i:1:d:10.1007_s10726-012-9329-z is not listed on IDEAS
    3. repec:spr:grdene:v:15:y:2006:i:5:d:10.1007_s10726-006-9041-y is not listed on IDEAS
    4. Flamini, Francesca, 2007. "First things first? The agenda formation problem for multi-issue committees," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 138-157, May.
    5. Francesca Flamini, "undated". "Strategic Effects and Incentives in Multi-issue Bargaining Games," Working Papers 2005_5, Business School - Economics, University of Glasgow.
    6. repec:spr:grdene:v:18:y:2009:i:2:d:10.1007_s10726-008-9119-9 is not listed on IDEAS
    7. Ignatius J. Horstmann & James R. Markusen & Jack Robles, 2001. "Multi-Issue Bargaining and Linked Agendas: Ricardo Revisited or No Pain No Gain," NBER Working Papers 8347, National Bureau of Economic Research, Inc.
    8. Zhang, Linlan & Song, Haigang & Chen, Xueguang & Hong, Liu, 2011. "A simultaneous multi-issue negotiation through autonomous agents," European Journal of Operational Research, Elsevier, vol. 210(1), pages 95-105, April.
    9. Francesca Flamini, "undated". "A Note on Agenda Restrictions in Multi-Issue Bargaining," Working Papers 2003_15, Business School - Economics, University of Glasgow.
    10. D r. (elect.) Julia Korosteleva, "undated". "Maximising Seigniorage and Inflation Tax: The Case of Belarus," Working Papers 2006_5, Business School - Economics, University of Glasgow.
    11. Marx, Leslie M. & Shaffer, Greg, 2007. "Rent shifting and the order of negotiations," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1109-1125, October.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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