The Role of Incomplete Contracts in Self-Enforcing Relationships

Incomplete contracts cannot be explained by focusing solely on the direct incentive effects of contract terms. The role of contract terms in facilitating self-enforcement must also be considered. Transactors avoid the costs of increased contractual specification, including the rigidity of explicit contracts, by using incomplete contract terms only to get close enough to desired performance so that the business relationship is self-enforcing over the broadest range of likely post-contract market conditions. Incomplete contract terms thereby efficiently complement transactors' limited reputational capital