Working Paper: NBER ID: w11110
Authors: Oriol Carbonell-Nicolau; Diego Comin
Abstract: The theory of incomplete contracting is rival to that of complete contracting as a frame of reference to understand contractual relationships. Both approaches rest upon diametrically opposed postulates and lead to very different policy conclusions. From a theoretical viewpoint, scrutiny of the postulates has revealed that both frameworks are reasonable. \nThis paper designs and implements an empirical test to discern whether contracts are complete or incomplete. We analyze a problem where the parties' inability to commit not to renegotiate inefficiencies is sufficient for contractual incompleteness. We study optimal contracts with and without commitment and derive an exclusion restriction that is useful to identify the relevant commitment scenario. The empirical analysis takes advantage of a data set from Spanish soccer player contracts. Our test rejects the commitment hypothesis, which entails the acceptance of the existence of contractual incompleteness in the data. We argue that our conclusions should hold a fortiori in many other economic environments.
Keywords: Incomplete Contract; Optimal Contract; Commitment; Renegotiation
JEL Codes: L10; L20; L60; K0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of commitment not to renegotiate contracts (D86) | contractual incompleteness (D86) |
| transfer fee (F16) | total financial outlay incurred by clubs (Z23) |
| commitment absent (J22) | transfer fee becomes significant predictor of total costs (F16) |
| sensitivity of transfer fee to total compensation (J33) | existence of contractual incompleteness (D86) |
| absence of commitment (J22) | non-separability of rent extraction and surplus division (D72) |