The Theory of Incomplete Contracts

Ronald Coase: Writing a good contract is costly.

Oliver Williamson: Also, the world is complex and unpredictable. Humans don’t have the ability to write contracts that plan for all possible contingencies, so contracts are renegotiated and revised all the time1.

Oliver Hart: Yeah. And there’s no guarantee that parties will agree to a renegotiation when something unexpected happens. Better allocate those future decision-making rights up front2.

Ethereum: What if we put it on the blockchain?

See Also:
Smart Contracts Don’t Have to be Dumb –Bloomberg

1. Oliver Williamson in Why Law, Economics, and Organization? (2005):

Most contracts are implemented under conditions of uncertainty for which adaptation to disturbances is needed. Because an incomplete contract between bilaterally dependent parties (that is, those for which continuity has value) is often silent on or makes incorrect or inadequate provision for some of these adaptations, contractual conflicts prospectively arise. Thus although mutual gains will always be realized upon costlessly restoring a position on the contract curve, each party may posture and make opportunistic representations over the division of gains. Costly delays and imperfect adaptations result.

2. Oliver Hart in Incomplete Contracts (1989):

If it is too costly to state precisely how a particular asset is to be used in every state of the world, it may be efficient to simply give one party ‘control’ of the asset, in the sense that he is entitled to do what he likes with it, subject perhaps to some explicit (contractible) limitations.

4 thoughts on “The Theory of Incomplete Contracts

  1. Are we waiting on which bank controls the blockchain software? Will there be small elite groups such as the large Indexed mutual funds and several large banks non transparent to outsiders?

      1. Because those that are used to ride a horse carriage, when you give them a motored vehicle, they would still bring their horse and latch on their new vehicle to it. That is the only right way to do it.

Leave a Reply