Talk:Complete contract

From Wikipedia, the free encyclopedia

complete contract meaning

[edit] Too short and incorrect

The current article is a stub. It is , i.m.h.o., better to create a "contracts in economics" page where the discussion of complete and incomplete contracts is discussed. Then a consistent discussion of complete and incomplete contracts, their definitions, the different methodologies and implications can be given proper attention. Also the link to default rules is not correct in this version. Default rules, according to the classic law and economics literature, is based either on a majoritarian rule or is written to induce the revelation of private information. A complete contract on the other hand is a contract where obligations are directly dependent on all performance relevant variables (i.e. all variables in the various utility functions). Default rules do not have this property, and cannot make a contract complete in this sence. A different, though misleading definition of complete contracts, that a contract is complete if it stipulates a rule in every possible state of the world, would make default rules contract completing institutions. Yet this definition is too simple, as Avery and Katz have mentioned. They point out that under the latter definition, every contract can be made complete by adding a clause "in all situations not dealt with in the above, rule X applies". It is a simple observation that adding such a clause by no means would guarantee that a pareto efficient exchange would result (assuming one is possible in the first place). In economic sence, the contract remains incomplete and does not maximize welfare given the restrictions.

Nvdb 08:45, 15 July 2006 (UTC)