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Testing Out Contractual Incompleteness: Evidence from Soccer

Author

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  • Oriol Carbonell-Nicolau

    () (Rutgers University)

  • Diego Comin

    () (New York University)

Abstract

The theory of incomplete contracting is rival to that of complete contracting as a frame of reference to understand contractual relationships. Both approaches rest upon diametrically opposed postulates and lead to very different policy conclusions. From a theoretical viewpoint, scrutiny of the postulates has revealed that both frameworks are reasonable. This paper designs and implements an empirical test to discern whether contracts are complete or incomplete. We analyze a problem where the parties' inability to commit not to renegotiate inefficiencies is sufficient for contractual incompleteness. We study optimal contracts with and without commitment and derive an exclusion restriction that is useful to identify the relevant commitment scenario. The empirical analysis takes advantage of a data set from Spanish soccer player contracts. Our test rejects the commitment hypothesis, which entails the acceptance of the existence of contractual incompleteness in the data. We argue that our conclusions should hold a fortiori in many other economic environments.

Suggested Citation

  • Oriol Carbonell-Nicolau & Diego Comin, 2005. "Testing Out Contractual Incompleteness: Evidence from Soccer," Departmental Working Papers 200501, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:200501
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    References listed on IDEAS

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    Cited by:

    1. Eberhard Feess & Michael Gerfin & Gerd Muehlheusser, 2015. "Contracts As Rent-Seeking Devices: Evidence From German Soccer," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 714-730, January.
    2. Helmut Dietl & Egon Franck & Markus Lang, 2008. "Why football players may benefit from the ‘shadow of the transfer system’," European Journal of Law and Economics, Springer, vol. 26(3), pages 419-419, December.

    More about this item

    Keywords

    commitment; incomplete contracts; optimal contracts; renegotiation;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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