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

Hart , Oliver; Moore, John

doi:10.2139/ssrn.517665

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

56 Pages Posted: 21 Mar 2004

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

There are 3 versions of this paper

Date Written: April 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 in". 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.

Keywords: agreements to agree, ruling out but not ruling in, bargaining, ex post inefficiency

JEL Classification: D8, D23, K12, L22

Suggested Citation: Suggested Citation

Hart, Oliver D. and Moore, John Hardman, Agreeing Now to Agree Later: Contracts that Rule Out But Do Not Rule in (April 2004). Available at SSRN: https://ssrn.com/abstract=517665 or http://dx.doi.org/10.2139/ssrn.517665