Explaining Incomplete Contracts as the Result of Contract-Reading Costs
Abstract
Much real-world contracting involves finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto-improving clauses: contract-reading costs matter as much as contract-writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Second-Best Pollution Taxation and Environmental Quality
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- Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology
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- Credits, Crises, and Capital Controls: A Microeconomic Analysis
- The Effects of Social Security Privatization on Household Saving: Evidence from Chile
- Complexity, Bounded Rationality and Heuristic Search
- Patent Theory versus Patent Law
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- Collusive Bidding in the FCC Spectrum Auctions
- Topics in Economic Analysis & Policy
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