Incomplete Contracts and Signalling

Kathryn E. Spier

RAND Journal of Economics, 1992, vol. 23, issue 3, 432-443

Abstract: This article presents a principal-agent model in which asymmetric information leads to contractual incompleteness. I show that in the presence of transactions costs, incompleteness may act as a signal of the principal's type. Two types of transactions costs are considered: those incurred ex ante (drafting costs) and those incurred ex post (enforcement or verification costs). I prove that in the presence of either of these costs asymmetric information leads to more contractual incompleteness than full information does.

Date: 1992
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