Journal Article

Satisficing Contracts

Patrick Bolton and Antoine Faure-Grimaud

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 3, pages 937-971
Published in print July 2010 | ISSN: 0034-6527
Published online July 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00597.x
Satisficing Contracts

More Like This

Show all results sharing this subject:

  • Economics

GO

Show Summary Details

Preview

We propose a model of equilibrium contracting between two agents who are “boundedly rational” in the sense that they face time costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less complete contracts.

Journal Article.  17247 words.  Illustrated.

Subjects: Economics

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.