Incomplete Contracting

Incomplete contracting theory originated in economics through the work of Oliver Hart, Sanford Grossman, and John Moore in the 1980s, and has been adapted to international relations to explain why states design treaties and institutions the way they do. The core claim is simple: because the future is uncertain, parties' rationality is bounded, and writing or verifying every contingency is costly, no contract can be truly complete. Gaps, ambiguities, and silences are unavoidable.

In IR, this insight reframes several puzzles:

• Why delegate to international organizations? Scholars such as Barbara Koremenos, Charles Lipson, and Duncan Snidal (in their Rational Design of International Institutions project, 2001) argue that states create IOs, dispute-settlement bodies, and review conferences precisely to fill gaps that the original text cannot anticipate. The WTO Dispute Settlement Body, for instance, interprets vague terms like "like products" case by case.
• Why include flexibility provisions? Escape clauses, sunset clauses, and renegotiation windows (common in trade and investment treaties) are responses to contractual incompleteness under uncertainty.
• Residual control rights. Borrowing from Hart and Moore, IR scholars ask which party gets to decide when the text is silent. In the EU, for example, the Court of Justice often exercises this residual authority.

Incomplete contracting contrasts with the assumption in some rationalist bargaining models that agreements are self-enforcing once signed. It also underpins critiques of formalism: because text cannot do all the work, informal norms, reputation, and ongoing relationships matter. Critics note that the theory can be hard to falsify — almost any treaty looks "incomplete" in hindsight — and that it sometimes understates the role of deliberate ambiguity, where vagueness is a feature rather than a bug used to secure agreement among parties with divergent preferences.