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Incomplete Contracts, Incentives and Economic Power

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  • Sripad Motiram

    (Indira Gandhi Institute of Development Research)

Abstract

This paper formalizes ideas from classical and radical political economy on task allocation and technology adoption under capitalism. A few previous studies have attempted this, but the framework and results in this paper are different. I model labor contracts that are incomplete owing to unforeseen/indescribable contingencies, leading to Pareto-improving renegotiation and a hold-up problem. Given path dependence, the allocation is sub-optimal, with the extent of inefficiency depending upon the degree of incompleteness. This model captures insights from the above literature on the microeconomic roots of inefficiency and power. It also provides a concrete setting where indescribable contingencies do (or dont) matter - a much-debated issue.

Suggested Citation

  • Sripad Motiram, 2010. "Incomplete Contracts, Incentives and Economic Power," Microeconomics Working Papers 23017, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:microe:23017
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    File URL: http://www.eaber.org/node/23017
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    2. Luca Anderlini & Leonardo Felli, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1085-1124.
    3. Bowles, Samuel, 1985. "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review, American Economic Association, vol. 75(1), pages 16-36, March.
    4. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    5. 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.
    6. John E. Roemer, 1979. "Divide and Conquer: Microfoundations of a Marxian Theory of Wage Discrimination," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 695-705, Autumn.
    7. Samuel Bowles & Herbert Gintis, 1993. "The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 83-102, Winter.
    8. Jerker Denrell, 2000. "Radical Organization Theory," Rationality and Society, , vol. 12(1), pages 39-66, February.
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    More about this item

    Keywords

    Incomplete Contracts; Unforeseen/Indescribeable Contingencies; Hold-Up; Classical and Radical Political Economy;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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