Interpretation Rules for Incomplete Contracts: A Laboratory Experiment∗

This paper provides an experimental test for incomplete contracting theory where interpretation is crucial. The paper tests simplified versions of models detailed by Heller & Spiegler (2008) and Shavell (2006). In the experiment, one player takes the role of a Writer of a contract, while the other player takes the role of a Decider who decides on a rule of interpretation to be used. Interpretation is used in the cases where the contract does not specify an action for a state of the world. The experiment uses a 2x2 experimental design, where the order of play is changed in one dimension and there is an increasing conflict of interest between the two players in the other dimension. As the conflict of interest grows, contracts should become more obligationally complete. The experimental results support that prediction. With few exceptions, play is found to be in accordance with subgame perfect equilibrium. JEL: C90, D23, D86, K12