Incomplete Agreements

On April 10, 2021, in Uncategorized, by admin

This relates to economic contracts that do not explicitly mention the conditions under which future issues can be decided between the contracting parties. It is argued that most contracts are incomplete by their nature, as it is impossible for the parties to foresee all possible future contingencies and to have perfect solutions to manage them. In addition, both parties may voluntarily decide to renegotiate the contract in the future, making the current terms void. The study on incomplete contracts was conducted by the American economists Oliver Hart and Sanford Grossman by their pioneering work of 1986 “The costs and benefits of ownership “. The cornerstone of Hart`s contribution to the theory of incomplete contracts is his 1986 paper with Sandy Grossman on the costs and benefits of ownership. In this article, they develop the formal theory of incomplete contracts, thus introducing the notions of control and power that have had a great impact in many areas beyond corporate theory (see Aghion et al 2016). Oliver Hart and Bengt Holmstrom were awarded the 2016 Nobel Prize in Economics. The prize was so deserved that the news was recorded with comments from Nobel laureates such as “Haven`t they already done it?” (Paul Krugman) and “Nobel Prize for The Best Quality” (George Akerlof). In this column, I focus on Oliver Hart`s contributions to contract theory, in particular our understanding of incomplete contracts. The incomplete approach to public procurement is still the subject of an ongoing debate in contract theory. In particular, some authors, such as Maskin and Tirole (1999), argue that rational parties should be able to solve the problem of maintaining by complex contracts, while Hart and Moore (1999) point out that these contractual solutions do not work if renegotiations cannot be excluded. [6] [7] [8] Some authors have argued that the pros and cons of vertical integration can sometimes be explained in comprehensive contractual models. [9] Williamson (2000) criticized the lack of property rights based on incomplete contracts because it focuses on incentives for ex ante investment, while neglecting ex post inefficiencies.

[10] Schmitz (2006) indicated that the approach to property rights could be extended to asymmetrical information, which could explain ex post inefficiencies. [11] The approach to property rights has also been expanded by Chiu (1998) and DeMeza and Lockwood (1998), which allow for the modelling of renegotiations. [12] [13] In a new extension, Hart and Moore (2008) argued that contracts could serve as benchmarks. [14] The theory of incomplete contracts has been successfully applied in various contexts, including privatization[15][16] international trade,[17][18] Research and Development Management,[19][20] Awarding formal and real authority,[21] Defenders[22] and many others.

 

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