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What Is Complete and Incomplete Contracts

The incomplete contracting approach has been the subject of an ongoing discussion in contract theory. The incomplete contract paradigm was developed by Sanford J. Grossman, Oliver D. Hart, and John H. Moore. In their fundamental contributions, Grossman and Hart (1986), Hart and Moore (1990) and Hart (1995) argue that contracts in practice cannot specify what to do in all possible eventualities. [1] [2] [3] At the time of contract award, future contingencies may not even be descriptible. In addition, the parties cannot commit to never engaging in mutually beneficial renegotiations later in their relationship. A direct consequence of the incomplete contractual approach is therefore the so-called hold-up problem. [4] Since the parties, at least in some countries of the world, will renegotiate their contractual arrangements at a later date, they have insufficient incentives to make relationship-specific investments (since the returns on one party`s investments go in part to the other party during renegotiations).

Oliver Hart and his co-authors argue that the problem of blocking can be mitigated ex ante by choosing an appropriate ownership structure (the incomplete contractual paradigm excludes more complex contractual arrangements). Therefore, the ownership approach of business theory can explain the pros and cons of vertical integration, thus providing a formal answer to important questions about the boundaries of the enterprise first raised by Ronald Coase (1937). [5] The 2016 Nobel Prize in Economics went to Oliver D. Hart and Bengt Holmström for their contributions to contract theory, including incomplete contracts. [23] In economic theory, the field of contract theory can be divided into the theory of complete contracts and the theory of incomplete contracts. .

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