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

  • 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10397.

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Date of creation: Mar 2004
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Handle: RePEc:nbr:nberwo:10397
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