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Why Parties May Deliberately Write Incomplete Contracts
Maija Halonen-Akatwijuka, Oliver Hart
Published online:

24 April 2024

Print publication:

23 May 2024
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Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on 'contracts as reference points'. Including a contingency of the form, 'The buyer will require a good in event E', has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract is strictly superior to a contingent contract. If parties have different views about the division of surplus, an incomplete contract can be superior if including a contingency would lead to divergent reference points.

17 - Legitimation through Modification: Do States Seek More Regulatory Space in Their Investment Agreements?
from Part IV - Legitimation Strategies
- By Tomer Broude, Yoram Z. Haftel, Alexander Thompson
Edited by Daniel Behn, Universitetet i Oslo, Ole Kristian Fauchald, Universitetet i Oslo, Malcolm Langford, Universitetet i Oslo
Book:

The Legitimacy of Investment Arbitration

Published online:

06 January 2022

Print publication:

13 January 2022, pp 531-554
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Summary

The starting point is the observation that some states are and have been unhappy with certain BITs that include ISDS provisions. Based on a dataset on renegotiated and terminated BITs, the authors ask if this is the case. The initial evidence indicates that states have not made a systematic effort over the years to recalibrate their BITs for the purpose of preserving more regulatory space. In fact, most renegotiations either leave ISDS provisions unchanged or render them more investor-friendly. Nevertheless, the authors find that this is beginning to change, as recent renegotiations are more likely to circumscribe ISDS in ways that preserve more state regulatory space.

The Economics of Covenants as a Means of Efficient Creditor Protection
Klaus M. Schmidt
Journal:

European Business Organization Law Review (EBOR) / Volume 7 / Issue 1 / March 2006

Published online by Cambridge University Press:

21 June 2006, pp. 89-94

Print publication:

March 2006
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Covenants are a means to mitigate the agency problems between borrower and lender that are induced by the allocation of cash flow rights in a debt contract. This comment shows that if covenants could be renegotiated without any transaction costs they could be used to induce efficient behaviour on the part of the borrower and to fully protect lenders. Due to problems of asymmetric information, collective action and hold-up, however, covenants are imperfect. The analysis suggests several ways to improve the functioning of covenants.