Contract Theory - Incomplete Contracts

Incomplete Contracts

Contract theory also utilizes the notion of a complete contract, which is thought of as a contract that specifies the legal consequences of every possible state of the world. More recent developments known as the theory of incomplete contracts, pioneered by Oliver Hart and his coauthors, study the incentive effects of parties' inability to write complete contingent contracts, e.g. concerning relationship-specific investments.

Because it would be impossibly complex and costly for the parties to an agreement to make their contract complete, the law provides default rules which fill in the gaps in the actual agreement of the parties.

During the last 20 years, much effort has gone into the analysis of dynamic contracts. Important early contributors to this literature include, among others, Edward J. Green, Stephen Spear, and Sanjay Srivastava.

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Famous quotes containing the words incomplete and/or contracts:

    Each of us is incomplete compared to someone else, an animal’s incomplete compared to a person ... and a person compared to God, who is complete only to be imaginary.
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