Complexity and Renegotiation: A Foundation for Incomplete Contracts

The paper considers a hold-up model where only one of n future trading opportunities will prove to be efficient, and where ex post renegotiation of the ex ante contract cannot be prevented. As the environment becomes more complex (n→S ), the outcome under any message-contingent long-term contract converges to that of the ‘‘incomplete contracting’’ model where trade is contractible ex post, but not ex ante. When trades are costly to describe, both ex ante and ex post, the incomplete contracting result is extended to a broader class of environments.