Premium
INCOMPLETE CONTRACTS MODELLING
Author(s) -
Basile Liliana,
Trani Raffaele
Publication year - 2008
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2008.00311.x
Subject(s) - incomplete contracts , context (archaeology) , verifiable secret sharing , ex ante , investment (military) , complete information , economics , mechanism (biology) , state (computer science) , microeconomics , term (time) , business , computer science , incentive , political science , macroeconomics , epistemology , law , paleontology , philosophy , physics , set (abstract data type) , algorithm , quantum mechanics , politics , programming language , biology
Contractual incompleteness has been understood in the literature as the conditions under which contracts are insufficiently state contingent due to non‐observable and/or non‐verifiable states of the world. The term incomplete contracts has been used in different meanings: to denote both proper contractual incompleteness (in a complete contracts context) due to various types of information problems, which can be contractually solved through a suitably designed mechanism and a context (an incomplete contracting context) where ex ante states of nature that are too expensive to describe prevent a contractual mechanism being designed. We examine these significantly different interpretations in both methodological and formal terms. We argue that, as long as relationship‐specific investment conditions occur, an incomplete contracting context is an innovative paradigm to the extent that it permits analysis of issues that in a complete contract context cannot even be broached, namely the recognition of non‐contractible inefficiencies and the possibility of non‐contractual solutions to such inefficiencies.