incomplete contract

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A contract that specifies the outcome in some but not in all possible states of the world. A contract may be incomplete through poor drafting or because some distinctions between different states are not publicly verifiable. For example, an employment contract may not be able to make the pay of a worker in a team conditional on the worker's effort because the contribution of individual workers to the team cannot be isolated. Disagreements arising through incomplete contracts are resolved by bargaining or litigation. See also agency theory.

Subjects: Economics.

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