Open Daily: 10am - 10pm | Alley door pickup 10am - 7pm 3038 Hennepin Ave Minneapolis, MN
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  • Open Daily: 10am - 10pm
    Alley-side Pickup: 10am - 7pm

    3038 Hennepin Ave Minneapolis, MN
    612-822-4611

Open Daily: 10am - 10pm | Alley-side Pickup: 10am - 7pm
3038 Hennepin Ave Minneapolis, MN
612-822-4611
More is Less

More is Less

Halonen-Akatwijuka, Maija
Hart, Oliver

Paperback

Series: Elements in Law, Economics and Politics

EconomicsGeneral Law

ISBN10: 1009396072
ISBN13: 9781009396073
Publisher: Cambridge University Press
Published: May 23 2024
Pages: 34
Weight: 0.13
Height: 0.07 Width: 6.00 Depth: 9.00
Language: English
Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on 'contracts as reference points'. Including a contingency of the form, 'The buyer will require a good in event E', has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract is strictly superior to a contingent contract. If parties have different views about the division of surplus, an incomplete contract can be superior if including a contingency would lead to divergent reference points.

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