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Bounded Rationality and Incomplete Contracts

  • Luca Anderlini
  • Leonardo Felli

This paper explores the link between boundedly rational behaviour and incomplete contracts. The bounded rationality of the agents in our world is embodied in a constraint that the contracts they write must be algorithmic in nature. We start with a definition of contract incompleteness that seems both appealing and widely applicable. Our first task is then to show that, by itself, the algorithmic nature of contracts is not enough to generate genuinely incomplete contracts in equilibrium. As in Anderlini and Felli (1994), we call this the Approximation Result. We then consider contractual situations in which the complexity costs of a contract are explicitly taken into accoaunt. We consider a broad (axiomatically defined) class of complexity measures and in this framework we show that incomplete contracts obtain in equilibrium. We also extensively discuss some recent literature directly related to the results reported here

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 407.

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Date of creation: Dec 2000
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Handle: RePEc:cep:stitep:407
Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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  1. 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.
  2. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
  3. Raghuram G. Rajan & Luigi Zingales, . "Power in a Theory of the Firm," CRSP working papers 335, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  6. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Anderlini, Luca & Felli, Leonardo, 1998. "Describability and agency problems," European Economic Review, Elsevier, vol. 42(1), pages 35-59, January.
  8. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
  9. 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.
  10. Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
  11. Anderlini, Luca & Felli, Leonardo, 1998. "Incomplete Contracts and Complexity Costs," MPRA Paper 28483, University Library of Munich, Germany.
  12. P. Battigalli & G. Maggi, 2000. "Imperfect Contracting," Princeton Economic Theory Papers 00s11, Economics Department, Princeton University.
  13. Nabil I. Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Events," CESifo Working Paper Series 1092, CESifo Group Munich.
  14. 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.
  15. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
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