Abstract

"Incompleteness as a Constraint in Contract Design"

Stefan Krasa and Steven R. Williams

First Author :

Stefan Krasa
Economics
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

skrasa@uiuc.edu

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Second Author :

Steven R. Williams
Economics
University of Illinois at Urbana-Champaign
1206 S. Sixth Street, M/C 706
Champaign, IL 61820
USA

swillia3@uiuc.edu

http://www.business.uiuc.edu/faculty/williams.html

Abstract :

We develop a model that encompasses both the incomplete contracts that are used in practice and the idealized complete contracts that address all contingencies. The objectives of the paper are to (i) examine the extent of the inefficiency caused by the constraint of contractual incompleteness; (ii) to identify properties of agents’ preferences that determine whether or not incompleteness causes inefficiency; and (iii) to analyze the implications of the incompleteness constraint on optimal contracts in principal-agent and bilateral trade models.

Manuscript Received : 2000

Manuscript Published : 2000

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