Bounded rationality and incomplete contracts

Anderlini, Luca and Felli, Leonardo (2000) Bounded rationality and incomplete contracts. TE/00/407. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Abstract

This paper explores the link between boundedly rational behaviour and incomplete contracts. The bounded rationality of the agents in our world is embodied in a constraint that the contracts they write must be algorithmic in nature. We start with a definition of contract incompleteness that seems both appealing and widely applicable. Our first task is then to show that, by itself, the algorithmic nature of contracts is not enough to generate genuinely incomplete contracts in equilibrium. As in Anderlini and Felli (1994), we call this the Approximation Result. We then consider contractual situations in which the complexity costs of a contract are explicitly taken into accoaunt. We consider a broad (axiomatically defined) class of complexity measures and in this framework we show that incomplete contracts obtain in equilibrium. We also extensively discuss some recent literature directly related to the results reported here.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://sticerd.lse.ac.uk/
Additional Information:	© 2000 Luca Anderlini and Leonardo Felli
Library of Congress subject classification:	H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System:	C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C69 - Other D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D89 - Other
Sets:	Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) Departments > Economics Collections > LSE Financial Markets Group (FMG) Working Papers
Identification Number:	TE/00/407
Date Deposited:	28 Feb 2008
URL:	http://eprints.lse.ac.uk/3582/

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