A complete contract is an important concept from

contract theory From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties. From an ...

. If the parties to an agreement could specify their respective rights and duties for every possible future state of the world, their contract would be complete. There would be no gaps in the terms of the contract. However, because it would be prohibitively expensive to write a complete contract, contracts in the real world are usually incomplete. When a dispute arises and the case falls into a gap in the contract, either the parties must engage in

bargaining In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a Goods and services, good or service debate the price or nature of a Financial transaction, transaction. If the bargaining produces agree ...

or the courts must step in and fill in the gap. The idea of a complete contract is closely related to the notion of

default rule {{not to be confused with, Default (law) In legal theory, a default rule is a rule of law that can be overridden by a contract, trust, will, or other legally effective agreement. Contract law, for example, can be divided into two kinds of rules: ...

s, e.g. legal rules that will fill the gap in a contract in the absence of an agreed upon provision. In economics, the field of

can be subdivided into the theory of complete contracts and the theory of

incomplete contracts In contract law, an incomplete contract is one that is defective or uncertain in a material respect. In economic theory, an incomplete contract (as opposed to a complete contract) is one that provides for the rights, obligations and remedies of th ...

. Complete contracting theory is also called agency theory (or principal-agent theory) and closely related to (Bayesian)

mechanism design Mechanism design (sometimes implementation theory or institution design) is a branch of economics and game theory. It studies how to construct rules—called Game form, mechanisms or institutions—that produce good outcomes according to Social ...

and implementation theory. The two most important classes of models in complete contracting theory are

adverse selection In economics, insurance, and risk management, adverse selection is a market situation where Information asymmetry, asymmetric information results in a party taking advantage of undisclosed information to benefit more from a contract or trade. In ...

and

moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs associated with that risk, should things go wrong. For example, when a corporation i ...

models. In this part of contract theory, every conceivable contractual arrangement between the contractual parties is allowed, provided it is feasible given the relevant technological and information constraints. In the presence of asymmetric information, the optimization problems can be handled due to the

revelation principle The revelation principle is a fundamental result in mechanism design, social choice theory, and game theory which shows it is always possible to design a strategy-resistant implementation of a Social welfare function, social decision-making mecha ...

. A leading textbook exposition of complete contract theory is Laffont and Martimort (2002). In contrast, incomplete contracting models consider situations in which only a restricted class of contracts is allowed, e.g. only simple ownership structures can be contractually specified in the Grossman-Hart-Moore theory of the firm.

References

External links

*Laffont, Jean-Jacques and David Martimort. ''The theory of incentives: The principal-agent model''. Princeton University Press, 2009. *Lawrence Solum,
Default Rules and Completeness
', Legal Theory Lexicon. {{DEFAULTSORT:Complete Contract Contract law Game theory