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Incomplete Contracts, Incentives and Economic Power

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  • Sripad Motiram

    (Indira Gandhi Institute of Development Research)

Abstract

This paper formalizes ideas from classical and radical political economy on task allocation and technology adoption under capitalism. A few previous studies have attempted this, but the framework and results in this paper are different. I model labor contracts that are incomplete owing to unforeseen/indescribable contingencies, leading to Pareto-improving renegotiation and a hold-up problem. Given path dependence, the allocation is sub-optimal, with the extent of inefficiency depending upon the degree of incompleteness. This model captures insights from the above literature on the microeconomic roots of inefficiency and power. It also provides a concrete setting where indescribable contingencies do (or dont) matter - a much-debated issue.

Suggested Citation

  • Sripad Motiram, 2010. "Incomplete Contracts, Incentives and Economic Power," Microeconomics Working Papers 23017, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:microe:23017
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    File URL: http://www.eaber.org/node/23017
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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