Bounded rationality and incomplete contracts

Luca Anderlini and Leonardo Felli

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper explores the link between boundedly rational behaviour and incomplete contracts. The bounded rationality of the agents in our world is embodied in a constraint that the contracts they write must be algorithmic in nature. We start with a definition of contract incompleteness that seems both appealing and widely applicable. Our first task is then to show that, by itself, the algorithmic nature of contracts is not enough to generate genuinely incomplete contracts in equilibrium. As in Anderlini and Felli (1994), we call this the Approximation Result. We then consider contractual situations in which the complexity costs of a contract are explicitly taken into accoaunt. We consider a broad (axiomatically defined) class of complexity measures and in this framework we show that incomplete contracts obtain in equilibrium. We also extensively discuss some recent literature directly related to the results reported here.

Keywords: Incomplete contracts; bounded rationality; complexity costs. (search for similar items in EconPapers)
JEL-codes: C69 D81 D89 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2000-12
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http://eprints.lse.ac.uk/3582/ Open access version. (application/pdf)

Related works:
Journal Article: Bounded rationality and incomplete contracts (2004)
Working Paper: Bounded Rationality and Incomplete Contracts (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:3582

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