IDEAS home Printed from https://ideas.repec.org/a/kap/theord/v97y2024i2d10.1007_s11238-024-09976-w.html
   My bibliography  Save this article

Incomplete contracts with disparity, uncertainty, information and incentives

Author

Listed:
  • Susheng Wang

    (Shanghai University
    Hong Kong University of Science and Technology)

Abstract

Cooperation among firms is governed by contracts. An interesting phenomenon is that some contracts are comprehensive while some are limited. This study tries to explain different levels of the incompleteness of contracts that firms choose to govern their cooperation with. We find that a limited contract is more efficient than a comprehensive contract if partners are highly disparate or product quality is largely uncertain, and vice versa. In contrast, if there are private information and incentives to invest in quality, a comprehensive contract is likely to be more efficient. These findings offer an understanding as to why incomplete contracts are so popular in practice.

Suggested Citation

  • Susheng Wang, 2024. "Incomplete contracts with disparity, uncertainty, information and incentives," Theory and Decision, Springer, vol. 97(2), pages 347-389, September.
    • Handle: RePEc:kap:theord:v:97:y:2024:i:2:d:10.1007_s11238-024-09976-w
    DOI: 10.1007/s11238-024-09976-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11238-024-09976-w
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11238-024-09976-w?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Dye, Ronald A, 1985. "Costly Contract Contingencies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-250, February.
    4. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    7. Hart, Oliver D, 1988. "Incomplete Contracts and the Theory of the Firm," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 119-139, Spring.
    8. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 83-114.
    9. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    10. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 139-149.
    11. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    12. Maskin, Eric, 2002. "On indescribable contingencies and incomplete contracts," European Economic Review, Elsevier, vol. 46(4-5), pages 725-733, May.
    13. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 57-82.
    14. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    15. Wang Susheng, 2010. "Contractual Incompleteness for External Risks," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-36, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang Susheng, 2010. "Contractual Incompleteness for External Risks," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-36, April.
    2. Oriol Carbonell-Nicolau & Diego Comin, 2005. "Testing Out Contractual Incompleteness: Evidence from Soccer," Departmental Working Papers 200501, Rutgers University, Department of Economics.
    3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
    4. Carbonell-Nicolau Oriol & Comin Diego, 2009. "Testing the Commitment Hypothesis in Contractual Settings: Evidence from Soccer," Journal of Quantitative Analysis in Sports, De Gruyter, vol. 5(4), pages 1-40, October.
    5. Nikolaev, Valeri V., 2018. "Scope for renegotiation in private debt contracts," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 270-301.
    6. Lewis A. Kornhauser & W. Bentley MacLeod, 2012. "Contracts between Legal Persons [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    7. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    8. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    9. Sandeep Baliga & Tomas Sjöström, 2009. "Contracting with Third Parties," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 75-100, February.
    10. Patrick Bolton & Antoine Faure-Grimaud, 2010. "Satisficing Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 937-971.
    11. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    12. Liliana Basile & Raffaele Trani, 2008. "Incomplete Contracts Modelling," Metroeconomica, Wiley Blackwell, vol. 59(3), pages 347-370, July.
    13. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    14. Ilya Segal & Michael D.Whinston, 2012. "Property Rights [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    15. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    16. Ernst Fehr & Michael Powell & Tom Wilkening, 2014. "Handing Out Guns at a Knife Fight: Behavioral Limitations of Subgame-Perfect Implementation," CESifo Working Paper Series 4948, CESifo.
    17. Fehr, Ernst & Powell, Michael & Wilkening, Tom, 2021. "Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 111(4), pages 1055-1091.
    18. Schmitz, Patrick W., 2013. "Incomplete contracts and optimal ownership of public goods," Economics Letters, Elsevier, vol. 118(1), pages 94-96.
    19. Patrick Legros & Andrew F. Newman, 2008. "Competing for Ownership," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1279-1308, December.
    20. Bester, Helmut, 2002. "Externalities and the Allocation of Decision Rights in the Theory of the Firm," CEPR Discussion Papers 3276, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Limited contracts; Comprehensive contracts;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:theord:v:97:y:2024:i:2:d:10.1007_s11238-024-09976-w. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.