Chapter

A Discussion of the Foundations of the Incomplete Contracting Model

Oliver Hart

in Firms, Contracts, and Financial Structure

Published in print October 1995 | ISBN: 9780198288817
Published online November 2003 | e-ISBN: 9780191596353 | DOI: http://dx.doi.org/10.1093/0198288816.003.0005

Series: Clarendon Lectures in Economics

 A Discussion of the Foundations of the Incomplete Contracting Model

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Discusses the foundations of the incomplete contracting model used in the previous chapters. The first part of the chapter examines the hold‐up problem in more detail. The author considers some natural ways of getting around contractual incompleteness in this set‐up, such as the existence of long‐term contracts, profit‐ and cost‐sharing arrangements, and more sophisticated forms of ownership. It is argued that if parties are unable to provide a detailed contractual description of the various contingencies that may arise and renegotiation is possible, these alternatives do not eliminate the hold‐up problem. The chapter concludes by pointing out that the hold‐up problem is a useful vehicle but not essential for the theory of property rights. What is required for a theory of asset ownership is that there is some inefficiency in the economic relationship, which the allocation of residual rights of control can influence.

Keywords: bounded rationality; cost‐sharing; describability; ex‐post efficiency; hold‐up problem; incomplete contract; ownership; profit‐sharing; renegotiation; residual control

Chapter.  7608 words.  Illustrated.

Subjects: Financial Markets

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