The Role of Incomplete Contracts in Self-Enforcing Relationships
THE ECONOMICS OF CONTRACTS: THEORIES AND APPLICATIONS, Eric Brousseau and Jean-Michel Glachant, eds., Cambridge University Press, 2002
Revue d’Economie Industrielle, No. 92, pp. 67-80, 2000
14 Pages Posted: 9 Jul 2011
Date Written: 2000
Incomplete contracts cannot be explained by focusing solely on the direct incentive effects of contract terms. The role of contract terms in facilitating self-enforcement must also be considered. Transactors avoid the costs of increased contractual specification, including the rigidity of explicit contracts, by using incomplete contract terms only to get close enough to desired performance so that the business relationship is self-enforcing over the broadest range of likely post-contract market conditions. Incomplete contract terms thereby efficiently complement transactors’ limited reputational capital.
JEL Classification: L14, K12
Suggested Citation: Suggested Citation