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Testing out Contractual Incompleteness: Evidence from Soccer

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Author Info
Oriol Carbonell-Nicolau
Diego Comin

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Abstract

The theory of incomplete contracting is rival to that of complete contracting as a frame of reference to understand contractual relationships. Both approaches rest upon diametrically opposed postulates and lead to very different policy conclusions. From a theoretical viewpoint, scrutiny of the postulates has revealed that both frameworks are reasonable. This paper designs and implements an empirical test to discern whether contracts are complete or incomplete. We analyze a problem where the parties' inability to commit not to renegotiate inefficiencies is sufficient for contractual incompleteness. We study optimal contracts with and without commitment and derive an exclusion restriction that is useful to identify the relevant commitment scenario. The empirical analysis takes advantage of a data set from Spanish soccer player contracts. Our test rejects the commitment hypothesis, which entails the acceptance of the existence of contractual incompleteness in the data. We argue that our conclusions should hold a fortiori in many other economic environments.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11110.

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Date of creation: Feb 2005
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Handle: RePEc:nbr:nberwo:11110

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Find related papers by JEL classification:
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
K0 - Law and Economics - - General

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Cited by:
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  1. Feess, Eberhard & Gerfin, Michael & Muehlheusser, Gerd, 2008. "Contracts as Rent Seeking Devices: Evidence from German Soccer," IZA Discussion Papers 3834, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Helmut Dietl & Egon Franck & Markus Lang, 2006. "Why football players may benefit from the "shadow of the transfer system"," Working Papers 0062, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2007. [Downloadable!]
    Other versions:
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