25E52000 - Market Entry Strategies for Entrepreneurial Business, Lecture, 11.1.2022-25.2.2022

Factors that prevent complete contracting

• Bounded rationality: Individuals have limited capacity to process information so they cannot know everything and foresee all possible contingencies that can arise over the course of a business relationship. Therefore, they cannot draw contracts that cover everything.
  
• Difficulties in specifying/measuring performance: It can be debated what performance of a partner constitutes fulfilment of a contract because performance cannot always (or even often) be measured unambiguously.
• Asymmetric information: Seller can have more relevant information that the buyer and the seller can use this information opportunistically. Contracting on items that are prone to information asymmetry is difficult.