Overconfidence and Endogenous Contract Incompleteness

We set up a model on the hold-up problem with uncertain bargaining power and find that, when agents are overconfident about their bargaining power ex ante, both of them may endogenously choose incomplete contract over complete contract even when complete contracting is feasible. The intuition behind the result is ceteris paribus, overconfidence leads to a higher expected return to relation-specific investment and higher investment level. Our model provides an additional behavioral explanation for the prevalence of contract incompleteness besides the existing ones in the literature