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

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  • Oliver Hart
  • John Moore

Abstract

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.

Suggested Citation

  • Oliver Hart & John Moore, 2004. "Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In," NBER Working Papers 10397, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10397
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    Cited by:

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    2. Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation 05/117, The Centre for Market and Public Organisation, University of Bristol, UK.
    3. Xinyu Hua, 2007. "Strategic ex ante contracts: rent extraction and opportunity costs," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 786-803, September.
    4. Schiller Daniel, 2012. "Editorial. Informal dynamics of economic processes," Zeitschrift für Wirtschaftsgeographie, De Gruyter, vol. 56(1-2), pages 1-8, October.
    5. Liliana Basile & Raffaele Trani, 2008. "Incomplete Contracts Modelling," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 347-370, July.
    6. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
    7. Chaserant, Camille, 2007. "Les fondements incomplets de l’incomplétude : Une revue critique de la théorie des contrats incomplets," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(2), pages 227-253, juin.
    8. Sudipto Bhattacharya & Sergei Guriev, 2006. "Patents vs. Trade Secrets: Knowledge Licensing and Spillover," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1112-1147, December.
    9. Garrouste, Pierre & Saussier, Stephane, 2005. "Looking for a theory of the firm: Future challenges," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 178-199, October.
    10. William Fuchs & Vinicius Carrasco, 2008. "Dividing and Discarding A Procedure for Taking Decisions with Non-transferable Utility," 2008 Meeting Papers 315, Society for Economic Dynamics.
    11. Bhattacharya, Sudipto & Guriev, Sergei, 2004. "Knowledge disclosure, patents and optimal organization of research and development," LSE Research Online Documents on Economics 19315, London School of Economics and Political Science, LSE Library.
    12. Shin, Dongsoo, 2008. "Information acquisition and optimal project management," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 1032-1043, July.
    13. Bade, Sophie & Haeringer, Guillaume & Renou, Ludovic, 2009. "Bilateral commitment," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1817-1831, July.
    14. Susanne Meyer & Daniel Schiller & Javier Revilla Diez, 2009. "The Janus‐Faced Economy: Hong Kong Firms As Intermediaries Between Global Customers And Local Producers In The Electronics Industry," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 100(2), pages 224-235, April.
    15. Birger Wernerfelt, 2007. "Renegotiation Facilitates Contractual Incompleteness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 893-910, December.
    16. Ricard Gil & Jordi Mondria, 2011. "Introducing managerial attention allocation in incentive contracts," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(3), pages 335-358, September.

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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