More is Less

Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable foreseeable and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on ''contracts as reference points''. Including a contingency of the form ''The buyer will require a good in event '' has a benefit and a cost. The benefit is that if occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in can hinder (re)negotiation in states outside. We show that if parties agree about a reasonable division of surplus an incomplete contract is strictly superior to a contingent contract. If parties have different views about the division of surplus an incomplete contract can be superior if including a contingency would lead to divergent reference points.