Agreeing Now to Agree Later: Contracts that Rule Out But Do Not Rule in

47 Pages Posted: 16 Jul 2008

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

John Moore

University of Edinburgh - Economics; London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 2004

Abstract

We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i.e., these are "ruled out". Ex post, they freely bargain over outcomes on the list, i.e., the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not "ruled out". A "loose" contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a "tight" contract (short list), even though this leads to ex post inefficiency.

JEL Classification: D23, O32, O34

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, Agreeing Now to Agree Later: Contracts that Rule Out But Do Not Rule in (March 2004). LSE STICERD Research Paper No. TE472, Available at SSRN: https://ssrn.com/abstract=1160999

Oliver D. Hart (Contact Author)

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