Working Paper: NBER ID: w10397
Authors: Oliver Hart; John Moore
Abstract: We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i.e., these are ruled out'. Ex post, they freely bargain over outcomes on the list, i.e., the contract specifies no mechanism to structure their choice; in this sense outcomes on the list are not ruled in'. A loose' contract (long list) maximizes flexibility but may interfere with ex ante investment incentives. When these incentives are important enough, the parties may write a tight' contract (short list), even though this leads to ex post inefficiency.
Keywords: Contracts; Negotiation; Investment Incentives
JEL Codes: D8; D23; K12; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| length of outcome list (C41) | flexibility (J62) |
| length of outcome list (C41) | ex ante investment incentives (G31) |
| tight contract (D86) | ex post inefficiency (D61) |
| loose contract (K12) | flexibility (J62) |
| loose contract (K12) | investment incentives (O31) |
| tight contract (D86) | investment incentives (O31) |
| tight contract (when relationship-specific investments are large) (L14) | preference for tight contract (D86) |
| loose contract (when relationship-specific investments are not large) (L14) | preference for loose contract (K12) |