DP60 Incomplete Contracts and Renegotiation

Author(s): John Hardman Moore, Oliver Hart
Publication Date: April 1985
Keyword(s): Bargaining, Incomplete Contracts, Renegotiation
JEL(s): 026
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=60

When drawing up a contract, it is often impracticable to specify all the possible relevant contingencies, and so contracts are typically incomplete. This paper considers the extent to which these gaps might be filled by building into the contract a mechanism for revising the terms of trade. One striking conclusion of the analysis is that because the parties can rescind the original contract and negotiate a new one, severe limitations are placed on the form the revisions can take. Moreover, these limitations depend crucially on what kind of communication mechanism the parties have at their disposal during revision.