Bounded Rationality and Incomplete Contracts

Luca Anderlini and Leonardo Felli

STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: This paper explores the link between boundedly rational behaviour and incomplete contracts. The bounded rationality of the agents in our world is embodied in a constraint that the contracts they write must be algorithmic in nature. We start with a definition of contract incompleteness that seems both appealing and widely applicable. Our first task is then to show that, by itself, the algorithmic nature of contracts is not enough to generate genuinely incomplete contracts in equilibrium. As in Anderlini and Felli (1994), we call this the Approximation Result. We then consider contractual situations in which the complexity costs of a contract are explicitly taken into accoaunt. We consider a broad (axiomatically defined) class of complexity measures and in this framework we show that incomplete contracts obtain in equilibrium. We also extensively discuss some recent literature directly related to the results reported here

Keywords: Incomplete contracts; bounded rationality; complexity costs (search for similar items in EconPapers)
Date: 2000-12
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://sticerd.lse.ac.uk/dps/te/te407.pdf (application/pdf)

Related works:
Journal Article: Bounded rationality and incomplete contracts (2004)
Working Paper: Bounded rationality and incomplete contracts (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:stitep:407

Access Statistics for this paper

More papers in STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE
Bibliographic data for series maintained by ().