Contentious Contracts

Ulrich Hege and Pascale Viala

No 1910, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper offers an explanation of rationally incomplete contracts, where incompleteness refers to unforeseen contingencies. Agents enter a two-sided moral hazard relationship, in which a commitment to discard parts of the joint resources may be ex-ante efficient. This happens through costly legal dispute which arises when contract terms are missing for undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level – the threshold between foreseen and unforeseen contingencies – and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the effort levels of the agents, less costly dispute is typically needed and the allocation will improve.

Keywords: burning money; contract law; Incomplete Contracts; Team Production; unforeseen contingencies (search for similar items in EconPapers)
JEL-codes: D82 K12 (search for similar items in EconPapers)
Date: 1998-06
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1910 (application/pdf)

Related works:
Working Paper: Contentious Contracts (2012)
Working Paper: Contentious Contracts (1997)
Working Paper: Contentious Contracts (1997)
Working Paper: Contentious Contracts (1997)
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:cpr:ceprdp:1910

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1910

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().