Incomplete Contracts and Renegotiation

Oliver D Hart and John Moore

Econometrica, 1988, vol. 56, issue 4, 755-85

Abstract: When drawing up a contract, it is often impracticable to specify all the relevant contingencies, and so contracts are typically incomplete. This paper considers the extent to which these gaps migh t be filled by building into the contract a mechanism for revising th e terms of trade. One conclusion is that because the par-ties can res cind the original contract and ne-gotiate a new one, severe limitatio ns are placed on the form the revisions can take. The authors charact erize the optimal revision mechanism both when the contract is used t o encourage relationship-specific investments and when it is used for risk sharing. Copyright 1988 by The Econometric Society.

Date: 1988
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Related works:
Working Paper: Incomplete Contracts and Renegotiation (1985)
Working Paper: Incomplete Contracts and Renegotiation (1985)
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