Bounded rationality and incomplete contracts

Anderlini, Luca and Felli, Leonardo (2000) Bounded rationality and incomplete contracts. . Suntory and Toyota International Centres for Economics and Related Disciplines, 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
Divisions:	Financial Markets Group STICERD Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	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
Date Deposited:	28 Feb 2008
Last Modified:	11 Dec 2024 18:28
URI:	http://eprints.lse.ac.uk/id/eprint/3582

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