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Incomplete Contracts, Incentives and Economic Power

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  • Sripad Motiram

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 don’t) matter - a much-debated issue. [WP-2010-011]

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  • Sripad Motiram, 2010. "Incomplete Contracts, Incentives and Economic Power," Working Papers id:3123, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:3123
    Note: Institutional Papers
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    References listed on IDEAS

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    6. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    7. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    8. John E. Roemer, 1979. "Divide and Conquer: Microfoundations of a Marxian Theory of Wage Discrimination," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 695-705, Autumn.
    9. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-460, March.
    10. Samuel Bowles & Herbert Gintis, 1993. "The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 83-102, Winter.
    11. Jerker Denrell, 2000. "Radical Organization Theory," Rationality and Society, , vol. 12(1), pages 39-66, February.
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