Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- Acknowledgments
- Part I Introduction
- Part II Contracts, organizations, and institutions
- Part III Law and economics
- Part IV Theoretical developments: where do we stand?
- 10 Transaction costs and incentive theory
- 11 Norms and the theory of the firm
- 12 Allocating decision rights under liquidity constraints
- 13 Complexity and contract
- 14 Authority, as flexibility, is at the core of labor contracts
- 15 Positive agency theory: place and contributions
- Part V Testing contract theories
- Part VI Applied issues: contributions to industrial organization
- Part VII Policy issues: anti-trust and regulation of public utilities
- Bibliography
- Index of names
- Subject index
13 - Complexity and contract
Published online by Cambridge University Press: 16 January 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- Acknowledgments
- Part I Introduction
- Part II Contracts, organizations, and institutions
- Part III Law and economics
- Part IV Theoretical developments: where do we stand?
- 10 Transaction costs and incentive theory
- 11 Norms and the theory of the firm
- 12 Allocating decision rights under liquidity constraints
- 13 Complexity and contract
- 14 Authority, as flexibility, is at the core of labor contracts
- 15 Positive agency theory: place and contributions
- Part V Testing contract theories
- Part VI Applied issues: contributions to industrial organization
- Part VII Policy issues: anti-trust and regulation of public utilities
- Bibliography
- Index of names
- Subject index
Summary
“The time is not here yet, but I hope it is coming when judges realize that the people who draft … contracts cannot envisage all the things that the future will bring.”
Introduction
Building upon the work of Simon (1957), Williamson (1975) observes that a fundamental reason for transaction costs is the impossibility of planning for all future contingencies in a relationship. The purpose of this chapter is to explore the conditions under which such complexity can constrain the set of feasible contracts, and help us better understand the contracts observed in practice. Specifically, a situation where agents are asked to make decisions when unforeseen events occur, but cannot renegotiate the contract is one I call ex post hold-up. In these cases, complexity can have an important impact upon the form of the optimal contract. The chapter begins by comparing the structure of the ex post hold-up problem to other contracting problems in the literature and suggests that a key ingredient in understanding the form of the optimal contract is the timing of information and actions in a relationship. Secondly, a way to measure contract complexity is suggested that has empirical implications. Finally, the optimal governance of contracts facing ex post hold-up when complexity is high depends upon the degree of correlation in subjective beliefs between the contracting parties.
Beginning with Simon (1951), there is a large literature that takes as given contract incompleteness due to transaction costs and then explores its implications for efficient governance.
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- Information
- The Economics of ContractsTheories and Applications, pp. 213 - 240Publisher: Cambridge University PressPrint publication year: 2002
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