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Programmed to Fail - 10. Culture

Acquisition Talk

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The Importance of Incentives in Contracts

Tightly specified contracts can be drawn up where knowledge is general and uncertainty is minimal. In these cases, incentives provide all the assurance the buyer needs. Contracts based on incentive compatibility can only provide assurance to both sides in a limited range of situations. If one party were to gain asymmetric knowledge, it exposes the other side to opportunism.

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