 Limited Attention and the Optimal Incompleteness of ContractsThe Journal of Law, Economics, and Organization, 1999, vol. 15, issue 2, 468-86 Abstract: A decision-maker's limited attention is allocated between writing new contracts and directing current contracts. More time spent writing a new contract makes the contract more complete. A more complete contract performs better and generates higher returns. The optimal allocation of attention implies two types of contracts, relational and market. A relational contract, which is directed periodically, is optimally less complete than a market contract, which is not directed. The completeness of relational contracts decreases with the ability to direct contracts, since changing circumstances can be dealt with later. In addition, the completeness of relational contracts increases with the ability to write new contracts, since more complete relational contracts are directed less frequently and leave more time for writing new contracts. The optimal allocation of attention to relational contracts is socially efficient even though it does not maximize the discounted expected returns of the firm. Copyright 1999 by Oxford University Press. Date: 1999 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:jleorg:v:15:y:1999:i:2:p:468-86 Ordering information: This journal article can be ordered from Access Statistics for this article The Journal of Law, Economics, and Organization is currently edited by Andrea Prat More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. |
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