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More is Less

by Maija Halonen-Akatwijuka , Oliver Hart
Save 17% Save 17%
Current price ₹2,282.00
Original price ₹2,739.00
Original price ₹2,739.00
Original price ₹2,739.00
(-17%)
₹2,282.00
Current price ₹2,282.00

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Book cover type: Paperback
  • ISBN13: 9781009396073
  • Binding: Paperback
  • Subject: N/A
  • Publisher: Cambridge University Press
  • Publisher Imprint: Cambridge University Press
  • Publication Date:
  • Pages: 34
  • Original Price: GBP 18.0
  • Language: English
  • Edition: N/A
  • Item Weight: 59 grams
  • BISAC Subject(s): Economics / General

Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on 'contracts as reference points'. Including a contingency of the form, 'The buyer will require a good in event E', has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract is strictly superior to a contingent contract. If parties have different views about the division of surplus, an incomplete contract can be superior if including a contingency would lead to divergent reference points.

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