Arrunada Seminar: Giorgio Zanarone – The Contracts behind Contracting
| Giorgio Zanarone |
The Contracts behind Contracting
Benito Arruñada’s “Institutional Foundations of Impersonal Exchange” is an important book in many ways. It develops a unified theory of property and business registries. It provides the reader with deep historical and institutional analyses that make the theory compelling. And it discusses paths for the reform of business formalization policies that challenge the conventional wisdom.
In my view, however, the most important contribution of Benito Arruñada’s book is broader and more subtle: it shifts the unit of analysis in the theory of the firm from personal to impersonal exchanges. From Coase (1937, 1960) and Williamson (1979) to Grossman and Hart (1986), Holmstrom and Milgrom (1994), and others, the economic theories of the firm have treated contracts as personal exchanges, with little analytic distinction between phyisical and legal persons. This has led to Alchian and Demsetz’s (1972) famous definition of the firm as a “nexus of contracts”.
By focusing on how hidden “originative” contracts make the consequences of present contracts uncertain, and on how registering contracts ex ante can reduce the uncertainty of good-faith acquirers of rights, Benito Arruñada’s book moves an important step towards an economic theory of the firm as a legal person. In that perspective, the nexus of contracts we call “firm” differs from a similar nexus of market contracts because, being the firm registered, external parties can contract with it without fearing that previous “internal” contracts will dilute their rights. In this sense, one could say that ex ante registration marks the boundary between firms and markets.
Beyond the book, these important insights are motivating and will motivate further research, along several lines. In a joint work in progress, Benito Arruñada, Nuno Garoupa and I are developing a formal model to compare “private-ordering” market solutions to the problem of impersonal exchange with regulated solutions, such as the contractual registries discussed in Benito’s book. In a similar vein, it would be interesting to incorporate impersonal exchange and contractual registries in a formal theory of firms’ boundaries. Finally, the book opens promising avenues for empirical research, from the comparative performance of registries and market solutions to the effects of business formalization policies in rich and developing countries. An exciting agenda for XXI-Century institutional and organizational economics!
Associate Professor, Colegio Universitario de Estudios Financieros (CUNEF)