 Efficiently imprecise contracts: The role of conventionalityJournal of Economic Behavior & Organization, 2025, vol. 236, issue C Abstract: Actual contracts are often imprecise. This paper presents a principal–agent model that incorporates writing costs and contractual interpretation to analyze contractual impreciseness. The model allows us to examine how the complexity of a good, along with the conventionality of a good, affects the contractual impreciseness in an efficient equilibrium. It is shown that complexity alone does not determine the degree of contractual impreciseness. If two goods are equally conventional, a more complex good results in a more imprecise contract due to the writing costs. However, a less complex good can have a more imprecise contract if it is sufficiently more conventional, as conventionality allows the principal to write a contract without specifying the details. It is also shown that if a good is sufficiently unconventional relative to its complexity, the principal internalizes production. This paper provides a foundation for incomplete contracts and offers explanations for empirical findings in the literature. Keywords: Imprecise contracts; Contractual interpretation; Conventionality; Complexity; Writing cost; A foundation of incomplete contract (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:236:y:2025:i:c:s0167268125002185 DOI: 10.1016/j.jebo.2025.107099 Access Statistics for this article Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D. More articles in Journal of Economic Behavior & Organization from Elsevier |
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