The efficiency of incomplete contracts: An empirical analysis of air force engine procurement

Keith J. Crocker, Kenneth J. Reynolds

Research output: Contribution to journalArticle

290 Scopus citations

Abstract

This article examines the incentives for contractual parties to design agreements that are left intentionally incomplete with regard to future duties or contingencies. More complete contracts mitigate ex post opportunism and the associated distortions in unobservable investment, but at the cost of additional resources expended in ex ante design. The optimal degree of contractual incompleteness involves a tradeoff between these opposing forces, the magnitudes of which may be predicted based on observable characteristics of the transactors and of the exchange environment. The resulting hypotheses are tested using panel data on the pricing procedures used in Air Force engine procurement contracts. We conclude that the degree of contractual completeness chosen in practice reflects a desire by the parties to minimize the economic costs associated with contractual exchange.

Original languageEnglish (US)
Pages (from-to)126-146
Number of pages21
JournalRAND Journal of Economics
Volume24
Issue number1
DOIs
StatePublished - Jan 1 1993

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The efficiency of incomplete contracts: An empirical analysis of air force engine procurement'. Together they form a unique fingerprint.

  • Cite this