Complexity Contract and Compensation

点击翻译按钮获取中文摘要

Project Abstract The role of classical contract law is to permit individuals to enter freely into obligations that can be enforced by the courts if necessary. Much of modern intervention by courts into the realm of private contract is based upon the fact that individuals do not always understand the implications of their contractual obligations at the time of signing a contract. In other cases unforeseen events, such as a contractor becoming ill or a worker having an accident, may not have been anticipated at the time the contract was signed. While it is widely recognized that bounded rationality on the part of individuals may lead to mistakes in contract formation, we currently do not have a good understanding of the appropriate way to model bounded rationality that can be used to study the issue of contract formation. This project consists of four parts. First a model of bounded rationality is developed that can be used to better understand errors human decision making, particularly during contract formation. Secondly this model is applied to the problem of contract formation in the employment relationship. It is shown how current employment institutions, such as employment at will, are efficient responses to the problem of contract formation between boundedly rational individuals. This work provides insight into the formation of labor law. The third part of the project extends these ideas to the problem of firm ownership. Using insights from recent work in cognitive psychology, this work formalizes the notion of ``judgment'' on the part of an entrepreneur. It is shown that it is efficient to allocate ownership rights (rather than have joint ownership) to those individuals that have superior abilities in judging worker quality. The fourth part of the project explores the dynamic implications of bounded rationality. In particular, the project will study the ability for firms to adjust their contractual obligations in the face of new information and technical change. An important issue is to better understand why organizations often fail, rather than take advantage of new and superior technologies. In addition to the construction of theoretical models, the implications of the models are tested empirically.