One of the most widespread contracts in the business relations sphere is the Customer-Supplier contract, which defines many aspects and details of the product or service transmission from one side of an agreement to another. More specifically, the contract involves a concrete sum of payment from the customer to the supplier for executing the order, the date of contract execution, and the penalties for failing to keep up with dates. On the other hand, both sides of the contract determine disputable liabilities, such as payment for delivery, product insurance, and standard verification. Incomplete contracts characteristics:
- The unpredicted sum of payoff for each unit of product/service in case of standard compliance failure.
- Unpredicted actions in case of delivery chain disruption.
- Moral Hazard: when one side of the agreement is ensured by legal obligations from the other side or third party, it tends to take higher risks, which are usually not prescribed.
The other important contract in the business sphere is an employment contract. To be more specific, the employment contract between an employer and an employee represents the official fact of the employee’s connection to the specific entity under certain conditions. These conditions include working hours, general or “legal” obligations concerning the organization’s operational activity, and employee role in this process. Incomplete contract characteristics:
- The lack of a specific list of obligations might lead to the worker’s excess work pressure.
- Lack of worker’s efficiency metrics: neither the company nor the employee does not prescribe the achievements that lead to the employee’s upgrading position in the company.
- Moral hazard: if the worker is connected with risk measurement, they tend to take the higher risk if the company has insurance on employee’s failures.
These are the characteristics of an incomplete contract:
- Bounded Rationality: Individuals cannot predict every contingency that could arise during the transaction.
- Difficulty Measuring Performance: How to define success? What is the definition of fulfilling?
- Asymmetric Information: Both Parties do not have equal access to all contract-relevant information. If one party knows something that the other party does not, the knowledgeable party may misrepresent that information.