CRC/TRR 190/1: Optimal Dynamic Contracting (SP B02)

Many economic transactions are governed by long-term contractual relationships. In the first funding period, we focussed on the methodological foundations of dynamic contracting and selected applications. This raised two important issues that we plan to study in more detail in the second funding phase: enforceability and ambiguity. A lack of enforceability and issues of ambiguity both undermine the trust of contracting parties in a contract and therefore negates the contract’s ultimate purpose of providing incentives. Such problems are especially severe for long-term contractual relationships in, for instance, financial and labour markets.