Abstract

"Limited Observability as a Constrint 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

Create Profile

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 :

Limited observability is the assumption that economic agents can only observe a finite amount of information. Given this constraint, contracts among agents are necessarily finite and incomplete in comparison to the ideal complete contract that we model as infinite in detail. We consider the extent to which finite contracts can approximate the idealized complete contracts. The objectives of the paper are: (i) to identify properties of agents’ preferences that determine whether or not finiteness of contracts causes significant inefficiency: (ii) to evaluate the performance of finite contracts against the ideal optimal contracts in principal-agent and bilateral bargaining models.

JEL Classification : D82 , C78

Keywords :

bounded rationality, contractual incompleteness, limited observability

Manuscript Received : 2001

Manuscript Published : 2001

This abstract has been viewed 2336 times.
Click here to view the full text of this paper.