More is Less : Why Parties May Deliberately Write Incomplete Contracts

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 ', has a benefit and a cost.

The benefit is that if occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in can hinder (re)negotiation in states outside.

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.