Incomplete Written Contracts: Undescribable States of Nature

Abstract

There are two views as to why people stay poor. The equal opportunity view emphasizes that differences in individual traits like talent or motivation make the poor choose low productivity jobs. The poverty traps view emphasizes that access to opportunities depends on initial wealth and hence poor people have no choice but to work in low productivity jobs. We test the two views using the random allocation of an asset transfer program that gave some of the poorest women in Bangladesh access to the same job opportunities as their wealthier counterparts in the same villages. The data rejects the null of equal opportunities. Exploiting small variation in initial endowments, we estimate the transition equation and find that, if the program pushes individuals above a threshold level of initial assets, then they escape poverty, but, if it does not, they slide back into poverty. Structural estimation of an occupational choice model reveals that almost all beneficiaries are misallocated at baseline and that the gains arising from eliminating misallocation would far exceed the costs. Our findings imply that large one-off transfers that enable people to take on more productive occupations can help alleviate persistent poverty.

Construction Contracts (or: How to Get the Right Building at the Right Price?)

“…In the context of an insurance contract, Townsend (1979) and Dye (1985) show that writing costs imply more pooling that is optimal in the absence of writing costs. Anderlini and Felli (1994) and Battigalli and Maggi (2002) extend this results to provide theories of incomplete contracts based upon the cost of adding clauses to a contract. Construction contracts provides a concrete illustration of how in the case of procurement these writing costs can be lowered via the allocation of control rights.…”

Quels fondements à l’incomplétude des contrats?

“…Anderlini et Felli (1994 définis-sent la rationalité limitée comme le fait de se plier à une procédure formelle dans la détermination des contingences à inclure dans le contrat. Formellement, les contrats sont définis comme des correspondances algorithmiques 3 entre l'espace des états de nature et les actions que les parties doivent prendre lorsqu'un état de ___________ 2.…”

Bounded rationality and incomplete contracts

“…Our analysis is largely based on the framework used in Anderlini and Felli (1994) and Anderlini and Felli (1999). We use this framework to highlight some of the difficulties that arise in generating contractual incompleteness from bounded rationality.…”

“…As in Anderlini and Felli (1994) our point of departure is to assume that contracts are algorithmic maps (Turing machines) between the state space and the actions to be taken by the two parties if a given state occurs (say the value of a sharing rule for the surplus generated by the trade). In this way, we model a 'limit case' of bounded rationality.…”