Symposium Article: Complete Contracts in Finance
20 Pages Posted: 11 Jun 2020
Date Written: May 17, 2020
Notwithstanding its significant influence in corporate finance, the theory of incomplete contracts is arguably misunderstood by courts enforcing contracts governing corporate transactions. In resolving such disputes, judges implicitly assume that complete contracts are both achievable and desirable when the parties are financially sophisticated, and they systematically assign blame to one of the parties for leaving the contract incomplete. This, in turn, prompts parties to write ever longer and more complex agreements. Such agreements do not necessarily produce more efficient outcomes, however. In fact, they may yield unexpected outcomes or interpretations, which can be enforced opportunistically by one of the parties or by third parties.
Keywords: incomplete contracts, rules and standards, opportunism
JEL Classification: K12, K22
Suggested Citation: Suggested Citation