INCOMPLETE CONTRACTING: A LABORATORY EXPERIMENTAL ANALYSIS

Steven C. Hackett

57 citations0/0 files storedEconomic Inquiry

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Experimental Behavioral Economics Studies Economic Theory and Institutions Law, Economics, and Judicial Systems

Abstract

Incomplete contracts are motivated by difficulties in specifying contingent responses to unforeseen change in long‐term trading relationships. The issues can be parsimoniously represented in a two‐period model. Parties first make transaction‐specific investment that enhances value or reduces cost. Surplus is then realized, and bargaining divides the surplus and completes the contract. The testable hypothesis is that realized surplus shares are independent of sunk investments. This is strongly rejected using laboratory experimental methods. Failure of the prediction affects the expected profitability of contracts.

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References

1986The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration 1975Markets and Hierarchies 1978Vertical Integration, Appropriable Rents, and the Competitive Contracting Process 1982Perfect Equilibrium in a Bargaining Model 1982An experimental analysis of ultimatum bargaining 1963Non-Contractual Relations in Business: A Preliminary Study 1994Fairness in Simple Bargaining Experiments 1986The Nash Bargaining Solution in Economic Modelling

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