Satisficing Contracts

Patrick Bolton and Antoine Faure-Grimaud

No 14654, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a model of equilibrium contracting between two agents who are "boundedly rational" in the sense that they face time-costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less up-front deliberation.

JEL-codes: C61 D81 D84 D86 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-bec and nep-cta
Note: CF IO LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Patrick Bolton & Antoine Faure-Grimaud, 2010. "Satisficing Contracts," Review of Economic Studies, Wiley Blackwell, vol. 77(3), pages 937-971, 07.

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Journal Article: Satisficing Contracts (2010)
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