Incomplete Contracts and the Design of Institutions

• Applicant: Professor Dr. Patrick W. Schmitz
• Subject Area: Economic Theory
• Term: since 2020
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 433238595

The theory of incomplete contracts has been one of the most important advances in microeconomics in the past three decades. It allows modeling the concepts of power and control, which is an indispensable prerequisite for a formal analysis of institutions. Yet, severe criticism has been directed at the established incomplete contracting approach. The vision of this project is to go back to the almost forgotten roots of the theory of incomplete contracts in order to facilitate a much-needed change of perspective. The goal of the project is to pave the way for a novel way of looking at incomplete contracts from a different angle and to significantly broaden the practical applicability of the incomplete contracts approach to the design of real-world institutions. Specifically, important insights are to be expected in fields such as political economy, environmental economics, and public procurement. Against the backdrop of the Brexit vote, how should referenda be designed? In the light of climate change, how should control rights be allocated to facilitate agreements on pollution prevention? In view of delays and cost overruns in cases such as the BER airport, how can institutions be designed to increase cost efficiency? The aim of the project is to provide innovative answers to such questions by taking a step back and making a new attempt to formalize the design of institutions based on simpler models that allow for novel foundations and highly policy-relevant applications of incomplete contracting.

• DFG Programme: Reinhart Koselleck Projects