Foundations of Incomplete Contracts

In the last few years, a new area has emerged in economic theory, which goes under the heading of 'incomplete contracting.' However, almost since its inception, the theory has been under attack for its lack of rigorous foundations. In this paper, the authors evaluate some of the criticisms that have been made of the theory, in particular, those in E. Maskin and J. Tirole (1999). In doing so, they develop a model that provides a rigorous foundation for the idea that contracts are incomplete.