Abstract
The notion of incomplete contracts refers to the circumstance that some aspect of contractual parties’ payoff-relevant future behavior or some relevant payoff in future contingencies is unspecified in the contract and/or unverifiable by third parties. This may be attributed, by and large, to three different causes: high enforcement costs entailing unverifiability by third parties such as courts or arbitrators; the transaction costs that arise from uncertainty about future events, from the contractual parties’ bounded rationality, and from judges’ bounded rationality; and, finally, from asymmetric information. Different research programs in the economics of contracting explore the implications of these different sources of contractual incompleteness, providing insights addressing an extremely wide range of contractual issues, including the theory of the firm, the theory of corporate finance, the analysis of formal and informal institutions, regulation and public ownership, innovation and intellectual property, and international trade. The extent to which the notion of contractual incompleteness also has relevant normative implications for the law and economics of contract regulation is an issue currently debated.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsReferences
Aghion P, Bolton P (1992) An incomplete contracts approach to financial contracting. Rev Econ Stud 593:473–494
Aghion P, Holden R (2011) Incomplete contracts and the theory of the firm: what have we learned over the past 25 years? J Econ Perspect 252:181–197
Aghion P, Dewatripont M, Rey P (1994) Renegotiation design with unverifiable information. Econometrica 62:257
Aghion P, Tirole J (1994) The Management of Innovation. The Quarterly Journal of Economics Vol. 109(4), pp. 1185–1209
Antràs P (2003) Firms, contracts, and trade structure. Q J Econ 118(4):1375–1418
Antràs P (2013) Goes global: incomplete contracts, property rights, and the international organization of production. J Law Econ Organ. First published online 17 Feb 2013. https://doi.org/10.1093/jleo/ews023
Aoki M (2001) Toward a comparative institutional analysis. MIT Press, Boston
Belloc F (2012) Corporate governance and innovation. J Econ Surv 265:835–864
Bolton P (2013) Corporate finance, incomplete contracts, and corporate control. J Law Econ Organ. First published online 9 Oct 2013. https://doi.org/10.1093/jleo/ewt010
Brousseau E, Glachant J-M (2002) The economics of contracts and the renewal of economics. In: Brousseau E, Glachant J-M (eds) The economics of contracts. Theories and applications. Cambridge University Press, Cambridge
Chung T-Y (1991) Incomplete contracts, specific investments and risk sharing. Rev Econ Stud 58:1031
Grossman SJ, Hart OD (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 944:691–719
Hart OD (1995) Firms, contracts, and financial structure. Oxford University Press, Oxford
Hart O (2008) Incomplete contracts. In: Durlauf SN, Blume LE (eds) The new Palgrave dictionary of economics, 2nd edn. Palgrave Macmillan, London
Hart OD, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98:1119–1158
Helpman E (2006) Trade, FDI, and the organization of firms. J Econ Lit 44(3):589–630
Hermalin BE, Katz ML (1993) Judicial modification of contracts between sophisticated parties: a more complete view of incomplete contracts and their breach. J Law Econ Organ 9:230
Maskin E, Tirole J (1999) Unforeseen contingencies, property rights, and incomplete contracts. Rev Econ Stud 66:83–114
Nicita A, Pagano U (2005) Incomplete contracts and institutions. In: Backhaus A (ed) Elgar companion to law and economics. Edward Elgar, Cheltenham, pp 145–164
North DC (1990) Institutions, institutional change and economic performance. Cambridge University Press, Cambridge
Nunn N (2007) Relationship-specificity, incomplete contracts and the pattern of trade. Q J Econ 1222:569–600
Pagano U, Rossi MA (2004) Intellectual property rights, incomplete contracts and institutional complementarities. Eur J Law Econ 182:55–76
Pagano U, Rowthorn R (1994) Ownership, technology and institutional stability. Struct Change Econ Dyn 52:221–243
Posner EA (2003) Economic analysis of contract law after three decades: success or failure? Yale Law J 112:829–880
Schmidt KM (1998) Contract renegotiation and option contracts. In: Newman P (ed) The new Palgrave dictionary of economics and the law. Palgrave Macmillan, London
Schmitz PW (2001) The hold-up problem and incomplete contracts: a survey of recent topics in contract theory. Bull Econ Res 53(1):1–17
Schwartz A (1998) Incomplete contracts. In: Newman P (ed) The new Palgrave dictionary of economics and the law. Macmillan/Stockton Press, London/New York
Williamson OE (1985) The economic institutions of capitalism. The Free Press, New York
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer Science+Business Media, LLC, part of Springer Nature
About this entry
Cite this entry
Rossi, M.A. (2019). Incomplete Contracts. In: Marciano, A., Ramello, G.B. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7753-2_83
Download citation
DOI: https://doi.org/10.1007/978-1-4614-7753-2_83
Published:
Publisher Name: Springer, New York, NY
Print ISBN: 978-1-4614-7752-5
Online ISBN: 978-1-4614-7753-2
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences