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Contentious Contracts

Author

Listed:
  • Hege, U.

    (Tilburg University, Center For Economic Research)

  • Viala, P.

Abstract

This paper offers an explanation of rationally incomplete contracts, where incompleteness refers to unforeseen contingencies. Agents enter a two-sided moral hazard relationship, in which a commitment to discard parts of the joint resources may be ex-ante efficient. This happens through costly legal dispute which arises when contract terms are missing for undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level – the threshold between foreseen and unforeseen contingencies – and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the effort levels of the agents, less costly dispute is typically needed and the allocation will improve.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Hege, U. & Viala, P., 1997. "Contentious Contracts," Discussion Paper 1997-109, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:6f3c7c98-ae1f-4113-a230-115aecf89880
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    File URL: https://pure.uvt.nl/ws/portalfiles/portal/527975/109.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Constanza M. Fosco Perea M, "undated". "Ambigüedad estratégica en contratos públicos de suministro," ILADES-UAH Working Papers inv127, Universidad Alberto Hurtado/School of Economics and Business.

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    More about this item

    Keywords

    incomplete contracts; unforeseen contingencies; burning money; team production; contract law;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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