Incomplete Contracts and the Theory of the Firm

9 June 2011 at 5:37 am 6 comments

| Peter Klein |

A very useful survey article from the Spring 2011 Journal of Economic Perspectives: “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. From the introduction:

In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,”  and then we briefly review some recent developments of the incomplete contracts approach.

I plan to use it in “Economics of Institutions and Organizations” this fall.

Update: Thanks to Stéphane Saussier for the pointer to the upcoming conference, Grossman and Hart at 25, June 24-26 in Brussels.

Entry filed under: - Klein -, Conferences, New Institutional Economics, Recommended Reading, Strategic Management, Theory of the Firm.

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