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Efficiently imprecise contracts: The role of conventionality

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  • Suzuki, Toru

Abstract

Actual contracts are often imprecise. This paper presents a principal–agent model that incorporates writing costs and contractual interpretation to analyze contractual impreciseness. The model allows us to examine how the complexity of a good, along with the conventionality of a good, affects the contractual impreciseness in an efficient equilibrium. It is shown that complexity alone does not determine the degree of contractual impreciseness. If two goods are equally conventional, a more complex good results in a more imprecise contract due to the writing costs. However, a less complex good can have a more imprecise contract if it is sufficiently more conventional, as conventionality allows the principal to write a contract without specifying the details. It is also shown that if a good is sufficiently unconventional relative to its complexity, the principal internalizes production. This paper provides a foundation for incomplete contracts and offers explanations for empirical findings in the literature.

Suggested Citation

  • Suzuki, Toru, 2025. "Efficiently imprecise contracts: The role of conventionality," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    • Handle: RePEc:eee:jeborg:v:236:y:2025:i:c:s0167268125002185
    DOI: 10.1016/j.jebo.2025.107099
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    References listed on IDEAS

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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