Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In
We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i. e. , these are “ruled out”. Ex post, they freely bargain over outcomes on the list, i. e. , the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not “ruled in”. A “loose” contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a “tight” contract (short list), even though this leads to ex post inefficiency.
Year of publication: |
2004
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Authors: | Hart, Oliver ; Moore, John |
Institutions: | Harvard Institute of Economic Research (HIER), Department of Economics |
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