Complexity and Renegotiation: A Foundation for Incomplete Contracts

Abstract

The paper considers a hold-up model where only one of n future trading opportunities will prove to be efficient, and where ex post renegotiation of the ex ante contract cannot be prevented. As the environment becomes more complex ( n →∞), the outcome under any message-contingent long-term contract converges to that of the “incomplete contracting” model where trade is contractible ex post , but not ex ante . When trades are costly to describe, both ex ante and ex post , the incomplete contracting result is extended to a broader class of environments.