Unforeseen Contingencies, Property Rights, and Incomplete Contracts

Abstract

We scrutinize the conceptual framework commonly used in the incomplete contract literature. This literature usually assumes that contractual incompleteness is due to the transaction costs of describing - or of even foreseeing - the possible states of nature in advance. We argue, however, that such transaction costs need not interfere with optimal contracting, provided that agents can probabilistically forecast their possible future payoffs.