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Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In

Listed author(s):
  • Oliver Hart
  • John Moore

We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i. e. , these are “ruled out”. Ex post, they freely bargain over outcomes on the list, i. e. , the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not “ruled in”. A “loose” contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a “tight” contract (short list), even though this leads to ex post inefficiency.

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File URL: http://www.economics.harvard.edu/pub/hier/2004/HIER2032.pdf
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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2032.

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Date of creation: 2004
Handle: RePEc:fth:harver:2032
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