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Reputation and the Dynamics of Contractual Incompleteness.

Numéro: 2011-6

Reputation and the Dynamics of Contractual Incompleteness.
Claudine Desrieux and Jean Beuve
Abstract: This article examines why in some cases parties are willing to sign agreements that are left intentionally incomplete with regard to future contingencies, and why they prefer to choose more complete agreements in some other situations.
More complete contracts allow avoiding ex-post renegotiations and the risk of hold-up, but also mean that parties have to expend more costs in ex-ante design. Another solution to avoid ex-post hold-up is to rely on relational contracting: one of the partner promises to renew the contract if the other does not hold up in case of renegotiations. This allows to save on the ex-ante costs, and by implication, to leave the contract incomplete, but the respect of the informal agreement is more uncertain. We build a model to show how parties to a contract choose between these two solutions to avoid hold-up, and how the degree of contractual (in)completeness evolves over time.

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