The economics of contracts: Theory and applications

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Figures......Page 10
Tables......Page 11
Contributors......Page 12
Acknowledgments......Page 18
Part I Introduction......Page 19
2 The central role of the notion of the contract in economic analysis......Page 21
3.1 Origins......Page 24
3.2 Incentive theory......Page 26
3.3 Incomplete contract theory......Page 28
3.4 The new institutional transaction costs theory......Page 30
3.5 The three base models and their ramifications......Page 32
4.1 A rereading of microeconomic interactions......Page 34
4.2 The analysis of the functioning of a decentralized market economy......Page 38
4.3 The analysis of institutions and of the institutional environment......Page 39
5.1 Differences in methodological perspective......Page 42
5.2 Empirical verification: case studies, econometrics, and experiments......Page 43
6.1 Measurement and data collection......Page 45
6.3 Selection processes......Page 46
6.5 Cross-disciplinary fertilizations......Page 47
NOTE......Page 48
1.1 Moral hazard......Page 49
1.2 Adverse selection......Page 51
2.1 Null contract and property-rights allocation......Page 53
2.2 Simple contract and first-best solution......Page 56
3 Transaction-cost theory......Page 57
Part II Contracts, organizations, and institutions......Page 61
2 The New Institutional Economics......Page 63
NOTE......Page 66
1 Introduction......Page 67
2 Obstacles......Page 68
3 Growing discontent......Page 69
4 Fashioning a response......Page 70
4.2 Unit of analysis......Page 71
4.3 Operationalization......Page 72
5 Looking ahead......Page 74
6 Concluding remarks......Page 75
NOTES......Page 76
1 Introduction......Page 77
2 Incomplete contracts......Page 78
3 Self-enforcing arrangements......Page 80
4 Contract terms complement self-enforcement......Page 81
5 The self-enforcing range of contractual relationships......Page 84
6 Vertical integration......Page 86
7 Conclusion......Page 87
NOTES......Page 88
1 Introduction......Page 90
2 Profit-seeking in a neoinstitutional environment......Page 92
3 The process of decision-making......Page 95
4 The firm’s property-rights structure......Page 101
5 The concept of efficiency......Page 106
6 Concluding thoughts......Page 110
NOTES......Page 112
Part III Law and economics......Page 115
1.1 A contract as a legal concept......Page 117
1.3 Unique concept of contract......Page 118
1.5 Reciprocated transfer......Page 119
2.1 The contract is a meeting of minds designed to carry legal weight......Page 120
2.2 The binding force of the contract depends upon its compliance with objective law......Page 122
3 Utility and justice are the ultimate aims of the contract......Page 124
3.1.1 The subordinate principle of legal security......Page 125
3.1.2 The subordinate principle of cooperation......Page 126
3.2 The contract is binding only if it is just......Page 128
3.2.1 The pursuit of equality of benefits......Page 129
3.2.2 The pursuit of equality of the parties......Page 131
NOTES......Page 132
1 Introduction......Page 134
2 The substantive function......Page 135
3.1 What is possible?......Page 137
3.2 What is desirable?......Page 138
NOTES......Page 142
1 Introduction......Page 144
2 Mattei v. Hopper......Page 145
3 Bloor v. Falstaff......Page 151
NOTES......Page 155
1 Introduction......Page 158
2 Property rights: general concepts......Page 160
3 Transaction-costs issues in the assignment and modification of property-rights adjustment: equity issues......Page 162
4 Transaction-costs issues in the assignment and modification of property-rights: measurement issues......Page 164
5.1 The benefits of unit agreement: the incentive to assign property rights......Page 166
5.2 Equity and measurement problems in unitization negotiations......Page 167
6 Concluding remarks......Page 172
NOTES......Page 173
Part IV Theoretical developments: where do we stand?......Page 175
1 Introduction......Page 177
2 The rent–efficiency trade-off: a procurement example......Page 180
3 The ideal world of the Revelation Principle......Page 182
4 Contractual externalities and transaction costs......Page 187
4.1 Vertical collusion......Page 188
4.2 Delegation......Page 190
4.3.2 The case of substitutes......Page 191
4.4 Renegotiation......Page 192
4.5 Biased principals......Page 193
5 Conclusion......Page 194
NOTES......Page 195
2 Background......Page 198
3 Modeling difficulties......Page 200
4 Norms and firm boundaries......Page 203
5 The role of formal contracts......Page 207
6 Summary and open questions......Page 208
NOTES......Page 209
1 Introduction......Page 211
2.1 Preferences and actions......Page 213
2.3 Renegotiation game......Page 214
3.1 Benchmark case: no wealth constraint......Page 215
3.2 Simple contracts under wealth constraints......Page 216
4.1 Limited wealth and ex post negotiation......Page 220
4.2 Limited liability and participation constraints......Page 223
NOTES......Page 228
1 Introduction......Page 231
2 Contracting scenarios......Page 234
2.1 Agency theory......Page 235
2.2 Hold-up......Page 238
2.3 Authority......Page 240
2.4 Ex post hold-up......Page 241
2.5 State-contingent contracts and complexity......Page 243
3 The sales contract revisited: ex ante governance......Page 245
4 Judgment and subjective performance evaluation......Page 247
4.1 Subjective contracting......Page 249
4.2 Relational contracts......Page 253
5 Discussion......Page 255
NOTES......Page 256
1 Introduction......Page 259
2 Decision, irreversibility, and information......Page 260
3 Contract, irreversibility, and information......Page 264
4 Conclusion......Page 267
NOTE......Page 268
1 Introduction......Page 269
2.1 The building blocks of the theory......Page 270
Block 1: The model of human behavior......Page 271
Block 2: The costs of transferring knowledge between actors......Page 273
Block 4: Alienability and the organizational rules of the game......Page 274
2.2.1 Organizational architecture......Page 275
2.2.2 Distribution of organizational forms......Page 276
3.1.1 The first common point: the managerial discretion framework......Page 277
3.1.2 The second common point: contractual efficiency......Page 279
3.2.1 The main differences: the analysis unit, the nature of costs, and the central organizational dimension......Page 280
3.2.2 The secondary differences: the nature of the processes and the neutrality of the nexus of contracts......Page 282
3.3 A revised comparative assessment......Page 283
4 Contributions and influence of positive agency theory......Page 284
4.1 The four main axes of the PAT research program......Page 285
4.2 Methodological contribution of positive agency theory......Page 286
5 Conclusions......Page 287
NOTES......Page 288
Part V Testing contract theories......Page 289
1 Introduction......Page 291
2.1.1 The contracting decision......Page 292
2.1.2 Contract duration......Page 293
2.2.1 Agency theory......Page 295
2.2.2 Transaction-cost economics......Page 296
2.3.2 Transaction-cost economics......Page 297
3.2.1 Agency theory......Page 300
3.2.2 Transaction-cost economics......Page 301
3.3.1 Agency theory......Page 302
3.3.2 Transaction-cost economics......Page 303
4.1 Agency theory......Page 305
5 Some cautionary notes......Page 306
NOTES......Page 309
1 Introduction......Page 311
2.1 Design and theoretical predictions......Page 314
2.2 Results and limitations......Page 315
2.3 Taking the agent’s potential rejection into account......Page 316
3 The principal’s behavior in one-shot interactions......Page 317
3.1 Design and theoretical predictions......Page 318
3.2 Results and interpretation......Page 319
3.3 Validation of these principles......Page 321
4.1.1 Design and theoretical predictions......Page 323
4.1.2 Results......Page 325
4.2.1 Design and theoretical prediction......Page 326
4.2.2 Results......Page 327
5 Conclusion......Page 328
NOTES......Page 330
Part VI Applied issues: contributions to industrial organization......Page 331
1 Introduction......Page 333
2 Defining franchising......Page 334
3 Residual claims and on-going rent as incentive mechanisms......Page 335
3.1 Residual claims in franchising......Page 336
3.2 Self-enforcement......Page 339
4 Substitutes or complements?......Page 341
5.1 Franchise contract terms supporting franchisees’ residual claimant status......Page 344
5.2.1 Increasing expected rent…......Page 345
5.2.2 Restricting the gains from deviation…......Page 347
6 Non-franchised systems with common mark or reputation concerns......Page 348
7 Conclusion......Page 350
NOTES......Page 351
1.1 The problem......Page 355
1.2 Asymmetric contracting......Page 356
2.1.1 First negotiation......Page 358
2.1.3 Payment period......Page 359
2.2 Annual revision of contracts......Page 361
3.1 The efficiency argument......Page 362
3.2 The monopoly arguments......Page 363
4 Sources of conflict......Page 364
5 Disciplinary mechanisms......Page 366
5.2 Explicit sanctions: discounts for inexact debits......Page 367
5.4 Merchandise returns......Page 368
6 Safeguards and regulation......Page 369
6.1 The efficient safeguard is imperfect......Page 370
6.2 No clear scope for regulation......Page 371
7 Summary......Page 372
NOTES......Page 373
1 Introduction......Page 376
2.1.1 The access to an essential facility......Page 378
2.1.2 Access regulation......Page 379
2.2.1 Competition and compatibility......Page 381
2.2.2 Financial transfers and collusion......Page 382
3 Contract theory and interconnection......Page 383
3.1 Network evolution, property rights, and rights of usage......Page 384
3.2 Institutions, transaction costs, and assignment of property rights......Page 385
3.3 Modularization and assignment of property rights in voice networks......Page 386
3.4 Ownership-rights assignment for data networks......Page 388
4 Conclusion......Page 389
NOTES......Page 390
1 Introduction......Page 391
2 Review of the economic literature on licensing contract design......Page 392
3 The role of patents as a transaction-cost reducing mechanism......Page 394
4 The market for chemical process technology......Page 397
5 Specialized engineering firms and division of labor......Page 400
6.1 Empirical evidence......Page 402
6.2 Why is there so much licensing by chemical producers?......Page 404
7 Why in chemicals?......Page 407
8 Conclusions......Page 408
NOTES......Page 409
Part VII Policy issues: anti-trust and regulation of public utilities......Page 411
1 Introduction......Page 413
2.1.1 Agreements covered by the new exemption: regulation 240/96......Page 414
2.1.2 Contractual clauses concerned in this new regulation......Page 415
2.2.1 Conditions for individual exemption from the provisions of article 81 §1 of the treaty......Page 417
2.2.2 A new analysis procedure of joint venture creation projects (new provisions of regulation no.1310/97)......Page 420
3.1 Vertical contracts and efficiency promotion......Page 422
3.1.1 Vertical restrictions and brand protection......Page 423
3.1.2 Time coordination of suppliers’ and distributors’ investments......Page 424
3.1.3 Territorial protection, promotion of inter-brand competition, and risk limitation of resellers......Page 425
3.2.1 Maintaining sufficient intra-brand competition......Page 426
3.2.2 Maintaining efficient inter-brand competition......Page 429
4 Conclusion......Page 431
NOTES......Page 432
2.1 Problems and solutions for natural monopolies......Page 434
2.2 Cost of service regulation......Page 437
2.3 Introduction of incentive contracts......Page 438
3.1 Incentive contracts and introduction of price caps......Page 440
3.2 Practical questions in incentive regulation of monopolies......Page 441
3.3 Strategic behavior by firm and regulator......Page 444
4.1 Industry structure......Page 448
4.2 Access pricing, bypass, and cross-subsidies......Page 450
4.3 Competition in telecoms networks......Page 451
4.4 Competition and distributive concerns......Page 453
5 Conclusions......Page 454
NOTES......Page 456
1 Introduction......Page 458
2 Contractual arrangements: characteristics of our sample......Page 459
3 Our analytical framework......Page 463
4.1 Investments......Page 466
4.1.3 Population affected......Page 467
4.4 Performance......Page 468
4.5 Checklist of our variables......Page 469
5.1 Determinants of contractual choice......Page 470
5.2 Mode of governance and performance......Page 475
6 Conclusion......Page 478
NOTES......Page 479
1 Introduction......Page 481
2 The utilities\' problem: regulatory governance and regulatory incentives......Page 483
2.1 The political profitability of expropriation......Page 484
2.3 Sources of regulatory commitment......Page 485
2.4 Institutional endowment......Page 486
3 “Optimal” restructuring myths in the electricity industry......Page 490
3.1 Transmission investment......Page 491
3.2 Generation markets......Page 494
3.3 Distribution investment......Page 495
4 Regulatory responses to market power allegations in the generation sector......Page 496
4.1 Market power and regulatory reform in the United Kingdom......Page 497
4.2 Market power and regulatory reform in California......Page 500
4.3 Market power and regulatory reform in El Salvador......Page 507
5 Final comments......Page 511
NOTES......Page 512
1 Introduction......Page 521
2 Basic characteristics of electricity supply and demand......Page 524
3 Performance problems with regulated electricity monopolies......Page 528
4 The basic reform model......Page 530
5 Performance improvements resulting from recent electricity sector reforms......Page 533
6 Problems encountered by reforms......Page 535
6.1 Local market power problems......Page 536
6.2 Management of network congestion......Page 538
6.3 Market power problems when supplies of generating capacity are tight......Page 540
6.4 Coordination of transmission and generation investments......Page 542
7 Conclusions......Page 543
NOTES......Page 546
Bibliography......Page 549
Index of names......Page 588
Subject index......Page 597