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Cognition and Incomplete Contracts

  • Tirole, Jean

Thinking about contingencies, designing covenants, and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design. (JEL D23, D82, D86, L22)

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 453.

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Date of creation: Feb 2008
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Publication status: Published in American Economic Review, vol.�99, n°1, mars 2009, p.�265-294.
Handle: RePEc:ide:wpaper:7039
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  1. Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
  2. Douglas W Diamond, 1992. "Bank Loan Maturity and Priority when Borrowers can Refinance," CEPR Financial Markets Paper 0022, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  3. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  4. Hermalin, Benjamin, 1990. "Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training," Department of Economics, Working Paper Series qt3636n9n2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Salvatore Piccolo & David Martimort, 2006. "The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment," CSEF Working Papers 160, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Dec 2006.
  6. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2003. "Renegotiation of concession contracts in Latin America," Policy Research Working Paper Series 3011, The World Bank.
  7. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  8. Patrick Bolton & Antoine Faure-Grimaud, 2005. "Thinking Ahead: The Decision Problem," NBER Working Papers 11867, National Bureau of Economic Research, Inc.
  9. Allen, Franklin & Gale, Douglas, 1992. "Measurement Distortion and Missing Contingencies in Optimal Contracts," Economic Theory, Springer, vol. 2(1), pages 1-26, January.
  10. Jonathan Levin & Steven Tadelis, 2007. "Contracting for Government Services: Theory and Evidence from U.S. Cities," NBER Working Papers 13350, National Bureau of Economic Research, Inc.
  11. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(2), pages 381-409, Fall.
  12. Valila, Timo, 2005. "How expensive are cost savings? On the economics of public-private partnerships," EIB Papers 4/2005, European Investment Bank, Economics Department.
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