Agreeing Now to Agree Later: Contracts that Rule Out but do not Rule In

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 out". 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.

Looking for a theory of the firm: Future challenges

“…He since returned to his original position, arguing how different the two approaches are (Williamson, 2000(Williamson, , 2002. 7 Nevertheless, recent developments of the incomplete contract theory shed some lights on this issue (Hart, 2004). contract theory does not suppose a monotone relationship between the size of the surplus and the probability of integration (Hart, 1988).…”

Information acquisition and optimal project management

“…Rotemberg and Saloner (1994), for example, show that without commitment to implementing a project, the principal may restrict its business horizon to induce the agents to be more innovative, even if that means having to forgo profitable opportunities ex post. Hart and Moore (2004) have similar result that the optimal contract may limit the choices even though it may bring ex post inefficiencies. Unlike our paper, both studies rely on limited commitment for their results.…”

The Janus‐faced Economy: Hong Kong Firms as Intermediaries Between Global Customers and Local Producers in the Electronics Industry

“…A typical incomplete contract is open‐ended, as two parties may ex ante agree on a list of potential outcomes which is specified by bargaining in due course. The ex post specification increases flexibility, since the contractual parties can adapt to changing conditions over time, but adversely affects the ex ante incentive structure when the allocation of property rights is still in limbo (Hart & Moore 2004). It is very likely that formal and informal agreements exist as complements rather than being substitutes.…”