Contentious Contracts

U. Hege, P. Viala

Research output: Working paperDiscussion paperOther research output

203 Downloads (Pure)

Abstract

This paper offers an explanation of rationally incomplete contracts where incompleteness refers to unforeseen contingencies. Agents enter a relationship with two-sided moral hazard in which a commitment to discard parts of the joint resources may be ex ante efficient. This happens through costly legal dispute which arises when contract terms are missing for the undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level - the threshold between foreseen and unforeseen contingencies - and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the e¤ort levels of the agents, less costly dispute is typically needed and the allocation will improve.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages38
Volume1997-109
Publication statusPublished - 1997

Publication series

NameCentER Discussion Paper
Volume1997-109

Fingerprint

Unforeseen contingencies
Dispute
Discards
Resources
Incomplete contracts
Litigation
Contingency
Obligation
Sharing rule
Moral hazard
Incompleteness
Optimal contract

Keywords

  • incomplete contracts
  • unforeseen contingencies
  • burning money
  • team production
  • contract law

Cite this

Hege, U., & Viala, P. (1997). Contentious Contracts. (CentER Discussion Paper; Vol. 1997-109). Tilburg: Finance.
Hege, U. ; Viala, P. / Contentious Contracts. Tilburg : Finance, 1997. (CentER Discussion Paper).
@techreport{6f3c7c98ae1f4113a230115aecf89880,
title = "Contentious Contracts",
abstract = "This paper offers an explanation of rationally incomplete contracts where incompleteness refers to unforeseen contingencies. Agents enter a relationship with two-sided moral hazard in which a commitment to discard parts of the joint resources may be ex ante efficient. This happens through costly legal dispute which arises when contract terms are missing for the undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level - the threshold between foreseen and unforeseen contingencies - and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the e¤ort levels of the agents, less costly dispute is typically needed and the allocation will improve.",
keywords = "incomplete contracts, unforeseen contingencies, burning money, team production, contract law",
author = "U. Hege and P. Viala",
note = "Pagination: 38",
year = "1997",
language = "English",
volume = "1997-109",
series = "CentER Discussion Paper",
publisher = "Finance",
type = "WorkingPaper",
institution = "Finance",

}

Hege, U & Viala, P 1997 'Contentious Contracts' CentER Discussion Paper, vol. 1997-109, Finance, Tilburg.

Contentious Contracts. / Hege, U.; Viala, P.

Tilburg : Finance, 1997. (CentER Discussion Paper; Vol. 1997-109).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Contentious Contracts

AU - Hege, U.

AU - Viala, P.

N1 - Pagination: 38

PY - 1997

Y1 - 1997

N2 - This paper offers an explanation of rationally incomplete contracts where incompleteness refers to unforeseen contingencies. Agents enter a relationship with two-sided moral hazard in which a commitment to discard parts of the joint resources may be ex ante efficient. This happens through costly legal dispute which arises when contract terms are missing for the undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level - the threshold between foreseen and unforeseen contingencies - and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the e¤ort levels of the agents, less costly dispute is typically needed and the allocation will improve.

AB - This paper offers an explanation of rationally incomplete contracts where incompleteness refers to unforeseen contingencies. Agents enter a relationship with two-sided moral hazard in which a commitment to discard parts of the joint resources may be ex ante efficient. This happens through costly legal dispute which arises when contract terms are missing for the undesirable outcomes. We show that an optimal contract needs only to specify the obligation for the more litigious party to assure a certain output level - the threshold between foreseen and unforeseen contingencies - and a linear sharing rule for the foreseen contingencies. If litigation reveals some information about the e¤ort levels of the agents, less costly dispute is typically needed and the allocation will improve.

KW - incomplete contracts

KW - unforeseen contingencies

KW - burning money

KW - team production

KW - contract law

M3 - Discussion paper

VL - 1997-109

T3 - CentER Discussion Paper

BT - Contentious Contracts

PB - Finance

CY - Tilburg

ER -

Hege U, Viala P. Contentious Contracts. Tilburg: Finance. 1997. (CentER Discussion Paper).