The Strategic Value of Flexibility: Reducing the Ability to Compromise

Abstract

In this paper we examine the strategic value of flexibility in a world with incomplete contracting. The study of incomplete contracting is motivated by four factors: 1) In a world of complete contingent contracts, most (but not all) interesting strategic considerations disappear. 2) There is a significant literature that addresses the implications of bargaining under the assumption of incomplete contracting. 3) There are sound theoretical reasons why we would expect contracts to be incomplete. 4) Empirically, we observe that most contracts are indeed incomplete.