DP60 Incomplete Contracts and Renegotiation
|Author(s):||John Hardman Moore, Oliver Hart|
|Publication Date:||April 1985|
|Keyword(s):||Bargaining, Incomplete Contracts, Renegotiation|
|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.