Limited observability as a constraint in contract design

Stefan Krasa; Steven R. Williams

doi:10.1016/j.jet.2006.01.008

Limited observability as a constraint in contract design

Stefan Krasa, Steven R. Williams

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

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 language	English (US)
Pages (from-to)	379-404
Number of pages	26
Journal	Journal of Economic Theory
Volume	134
Issue number	1
DOIs	https://doi.org/10.1016/j.jet.2006.01.008
State	Published - May 2007

Keywords

Bounded rationality
Contractual incompleteness
Limited observability

ASJC Scopus subject areas

Economics and Econometrics

Online availability

10.1016/j.jet.2006.01.008

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Limited observability as a constraint in contract design

Abstract

Keywords

ASJC Scopus subject areas

Online availability

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