Symposium- Incomplete Contracts: Judicial Responses, Transaction Planning, and Litigation Strategies - Introduction

This introduction introduces three articles in a Symposium by Richard Craswell, Avery Katz, Robert Scott and George Triantis on the topic of incomplete contracts. The Symposium appears in 56 CASE WES. L. REV. 135 (2005). The recognition that parties will often fail to achieve completely contingent contracts that provide for an optimal outcome in any future state of the world raises the important question of what role courts could or should play in such contracts. Scholars working in the law-and-economics tradition have suggested that courts should use a hypothetical bargain approach to incompleteness, filling in terms that are optimal (efficient) and that the parties themselves would have achieved were it not for the transaction costs. While the authors in this Symposium draw on this traditional economic analysis of contracts, they explore new insights from economics that complicate the analysis of incompleteness in contracts. Relying on economists\u27 theories of incomplete contracts, the Symposium authors identify uncertainty and the cost of and limited access to information as key problems affecting parties both ex ante when contracts are being drafted and ex post when they are being enforced. Uncertainty is a factor that makes it difficult to negotiate contracts that can simultaneously protect specific investments and also promote efficiency ex post. The Symposium authors sort out what economists and lawyers mean when they reference an incomplete contract and identify two key assumptions of the new economic literature. These two assumptions are (1) courts are imperfect and may be unable to verify certain facts, and (2) parties can renegotiate the terms of their contracts. Using these insights, the three authors address the implications of the verifiability problem and possibility of renegotiating contractual terms for (1) parties designing complete and contingent efficient contracts, (2) scholars designing theoretical solutions to the verifiability problem, (3) courts searching for rules that will best promote optimal investment beforehand and ex post efficiency once the future has resolved the prior uncertainty, and (4) contracts scholars attempting to decide what issues should be further explored

Symposium - Incomplete Contracts: Judicial Responses, Transactional Planning, and Litigation Strategies - Introduction

This introduction introduces three articles in a Symposium by Richard Craswell, Avery Katz, Robert Scott and George Triantis on the topic of incomplete contracts. The Symposium appears in 56 CASE WES. L. REV. 135 (2005). The recognition that parties will often fail to achieve completely contingent contracts that provide for an optimal outcome in any future state of the world raises the important question of what role courts could or should play in such contracts. Scholars working in the law-and-economics tradition have suggested that courts should use a hypothetical bargain approach to incompleteness, filling in terms that are optimal (efficient) and that the parties themselves would have achieved were it not for the transaction costs. While the authors in this Symposium draw on this traditional economic analysis of contracts, they explore new insights from economics that complicate the analysis of incompleteness in contracts. Relying on economists\u27 theories of incomplete contracts, the Symposium authors identify uncertainty and the cost of and limited access to information as key problems affecting parties both ex ante when contracts are being drafted and ex post when they are being enforced. Uncertainty is a factor that makes it difficult to negotiate contracts that can simultaneously protect specific investments and also promote efficiency ex post. The Symposium authors sort out what economists and lawyers mean when they reference an incomplete contract and identify two key assumptions of the new economic literature. These two assumptions are (1) courts are imperfect and may be unable to verify certain facts, and (2) parties can renegotiate the terms of their contracts. Using these insights, the three authors address the implications of the verifiability problem and possibility of renegotiating contractual terms for (1) parties designing complete and contingent efficient contracts, (2) scholars designing theoretical solutions to the verifiability problem, (3) courts searching for rules that will best promote optimal investment beforehand and ex post efficiency once the future has resolved the prior uncertainty, and (4) contracts scholars attempting to decide what issues should be further explored

Solution of the Ellsberg paradox by means of the principle of uncertain future

The principle of uncertain future: the probability of a future event contains an (hidden) uncertainty. The first consequence of the principle: the real values of high probabilities are lower than the preliminarily determined ones; conversely, the real values of low probabilities can be higher than the preliminarily determined ones. The first consequence provides an uniform solution of the underweighting of high and the overweighting of low probabilities, of the Allais paradox, risk aversion, loss aversion, the equity premium puzzle, the “fourfold pattern” paradox, etc. The second consequence: the present probability system of a future event is incomplete. The second consequence provides a solution of the incompleteness of systems of preferences, of ambiguity aversion, of the Ellsberg paradox, etc.uncertainty, risk, utility, choice, decisions, probability

Incompleteness in Insurance: An Analysis of the Multiplicative Case

Risk and Uncertainty,

Incomplete Markets, Growth, and the Business Cycle

We introduce a Ramsey growth model with incomplete markets, decentralized production, and idiosyncratic technological risk. The combination of uninsurable shocks with the precautionary motive can slow down capital accumulation or give rise to persistent fluctuations even when agents are very patient and technology is strictly convex. The model generates closed-form expressions for the equilibrium dynamics under a finite or infinite horizon. Multiple steady states and poverty traps can arise from the endogeneity of the interest rate instead of the usual wealth effect. Depending on the economy's parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. In calibrated examples, financial incompleteness substantially slows down convergence to the steady state and thus increases the persistence of aggregate shocks.

Original and Derived Judgment An Entrepreneurial Theory of Economic Organization

Recent work links entrepreneurship to the economic theory of firm using the Knightian concept of entrepreneurship as judgment. When judgment is complementary to other assets, and these assets or their services are traded in well-functioning markets, it makes sense for entrepreneurs to hire labor and own assets. The entrepreneur’s role, then, is to arrange or organize the human and capital assets under his control. We extend this Knightian concept of the firm by developing a theory of delegation under Knightian uncertainty. What we call original judgment belongs exclusively to owners, but owners may delegate a wide range of decision rights to subordinates, who exercise derived judgment. We call these employees “proxy-entrepreneurs,” and ask how the firm’s organizational structure — its formal and informal systems of rewards and punishments, rules for settling disputes and renegotiating agreements, means of evaluating performance, and so on — can be designed to encourage forms of proxy-entrepreneurship that increase firm value while discouraging actions that destroy value. Building on key ideas from the entrepreneurship literature, Austrian economics, and the economic theory of the firm we develop a framework for analyzing the tradeoff between productive and destructive proxy-entrepreneurship. We link this analysis to the employment relation and ownership structure, providing new insights into these and related issues in the economic theory of the firm.Judgment, entrepreneur, delegation, employment relation, ownership

Controlling price volatility through financial innovation

In this paper, the authors study the possibility of controlling asset price volatility through financial innovation in a three-period finite competitive exchange economy with incomplete financial markets and retrading.incomplete markets; financial innovation; volatility