Incomplete Contracts, Incentives and Economic Power

Sripad Motiram
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Sripad Motiram: Indira Gandhi Institute of Development Research

Microeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: This paper formalizes ideas from classical and radical political economy on task allocation and technology adoption under capitalism. A few previous studies have attempted this, but the framework and results in this paper are different. I model labor contracts that are incomplete owing to unforeseen/indescribable contingencies, leading to Pareto-improving renegotiation and a hold-up problem. Given path dependence, the allocation is sub-optimal, with the extent of inefficiency depending upon the degree of incompleteness. This model captures insights from the above literature on the microeconomic roots of inefficiency and power. It also provides a concrete setting where indescribable contingencies do (or dont) matter - a much-debated issue.

Keywords: Incomplete Contracts; Unforeseen/Indescribeable Contingencies; Hold-Up; Classical and Radical Political Economy (search for similar items in EconPapers)
JEL-codes: D21 D86 (search for similar items in EconPapers)
Date: 2010-01
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