The Explanation of Incomplete Contracts in Mainstream Contract Theory: A Critique of the Distinction between "Observable" and "Verifiable"

Lind Hans

Mainstream contract theory often makes a distinction between things that are observable by the contracting parties but not verifiable by a third party. This distinction has, e.g. been used to explain why contracts are incomplete in some dimensions and claimed to provide the foundations of incomplete contract theory.

This article sets out to scrutinize the assumption and argues that if something is observable by the parties, the parties can ex ante, without prohibitive costs, make these features verifiable by a third party. This implies that the distinction between observable and verifiable cannot be a fundamental explanation for incomplete contracts. Ex post it can be difficult to verify statements by a third party, but then it must be explained why the parties had not ex ante taken measures to make it possible to verify ex post. A number of such explanations are discussed in the paper. The arguments put forward are based on two detailed examples and also supported by important theories from the philosophy of language, which underline that concepts must be related to something observable in order to be learnt.

MEET US


5-6
Dec

Vision Zero for Sustainable Road Safety in the Baltic Sea Region

The conference Vision Zero for Sustainable Road Safety in the Baltic Sea Region is held i Vilnius, Lithuania. VTI is part of the organisation committé and also one of the speakers.

LATEST NEWS


2018-10-05

Users contribute to the development of train simulators

Apart from advanced driving simulators, VTI has developed several variations of train simulators which are used for training, education and research. In recent years, interest has increased drastically among major actors in the railway sector, and VTI has...


2018-10-03

VR study to contribute to a better working environment for bus drivers

A study where bus drivers test autonomous driving in a VR environment may contribute to a better working environment with reduced stress on the driver and safer driving.


2018-10-02

Non-native plant species spread via transport systems

Researchers at VTI have compiled a report on non-native invasive plant species in Sweden and how they spread via transport systems.


2018-09-20

EU-project VIRTUAL: improving road safety with virtual crash tests

Crash tests are used to improve safety on roads. Therefore the EU now funds a research project to develop virtual methods of crash testing. VTI coordinates the project, called VIRTUAL. The project now invites experts interested in Human Body Modeling to join...


2018-08-28

EU project protects cyclists and pedestrians

According to the World Health Organisation, more than one quarter of road traffic fatalities in 2010 were pedestrians and cyclists. Every year, about 335,000 unprotected road users die because of traffic accidents, which shows the scale of the problem. The EU...


2018-08-21

Swedish organisations in EU project on traffic safety and crash testing

Crash safety testing is one of the tools used to improve safety on roads. The EU is therefore funding a research project that started recently to develop virtual methods of crash testing. The long-term goal is to supplement the physical evaluation of crash...