Limited observability as a constraint in contract design

Stefan Krasa, Steven R. Williams

Research output: Contribution to journalArticlepeer-review


Limited observability is the assumption that economic agents can only observe a finite amount of information. Given this constraint, contracts among agents are necessarily finite and incomplete in comparison to the ideal complete contract that we model as infinite in detail. We consider the extent that finite contracts can approximate a complete contract. The objectives of the paper are: (i) to identify properties of agents' preferences that determine whether or not finiteness of contracts causes significant inefficiency; (ii) to evaluate the performance of finite contracts against the ideal optimal contract in a bilateral bargaining model.

Original languageEnglish (US)
Pages (from-to)379-404
Number of pages26
JournalJournal of Economic Theory
Issue number1
StatePublished - May 2007


  • Bounded rationality
  • Contractual incompleteness
  • Limited observability

ASJC Scopus subject areas

  • Economics and Econometrics


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