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.
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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
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DOI: https://doi.org/10.1007/978-1-4614-7753-2_83
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