Working Paper: NBER ID: w14654
Authors: Patrick Bolton; Antoine Faure-Grimaud
Abstract: We propose a model of equilibrium contracting between two agents who are "boundedly rational" in the sense that they face time-costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less up-front deliberation.
Keywords: Contracts; Bounded Rationality; Satisficing
JEL Codes: C61; D81; D84; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deliberation costs (D79) | Incomplete contracts (D86) |
| Deliberation costs (D79) | Satisficing contracts (D86) |
| Aligned interests (Y80) | Incomplete action plans (D52) |
| Conflicts among agents (D74) | More complete contracts (D86) |