Satisficing Contracts
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NBER Working Paper No. 14654
Issued in January 2009
NBER Program(s):Corporate Finance, Industrial Organization, Law and Economics
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.
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Document Object Identifier (DOI): 10.3386/w14654
Published: Patrick Bolton & Antoine Faure-Grimaud, 2010. "Satisficing Contracts," Review of Economic Studies, Wiley Blackwell, vol. 77(3), pages 937-971, 07. citation courtesy of 