The theory of incomplete contracts studies contractual relationships in which the terms cannot be fully specified. It examines the gaps and imperfections of real-world contracts, where it is difficult to anticipate all possible contingencies. This theory emphasizes incentives and mechanisms that allow parties to commit despite the incomplete nature of agreements. It also proposes practical incentive mechanisms to encourage performance and ensure quality.

These mechanisms include financial penalties for delays, bonuses for early delivery, quality and inspection clauses, and payment reductions for defective products, among others.