The Economics of Contracts: Theories and Applications

The Economics of Contracts: Theories and Applications

The Economics of Contracts: Theories and Applications

The Economics of Contracts: Theories and Applications


This is a comprehensive and up-to-date synthesis of the economic analysis of contracts written by a specially commissioned team of leading international scholars. The book offers a well structured analysis of theoretical developments, the diverse fields of applications, the methodologies in use, and the policy implications at both firm and state level. It offers a unique combination of theoretical and applied economics along with insights from law and management sciences. The volume is designed to appeal to scholars, graduate students and practitioners in economics, management and law.


To an economist, a contract is an agreement under which two parties make reciprocal commitments in terms of their behavior – a bilateral coordination arrangement. of course, this formulation touches on the legal concept of the contract (a meeting of minds creating effects in law), but also transcends it. Over the course of the past thirty years, the “contract” has become a central notion in economic analysis (section 2), giving rise to three principal fields of study: “incentives, ” “incomplete contracts, ” and “transaction costs” (section 3). This opened the door to a revitalization of our understanding of the operation of market economies… and of the practitioner's “toolbox” (section 4).

The goal of this chapter is to provide an overview of recent developments in these analytical currents, to present their various aspects (section 5), and to propose expanding horizons (section 6). the potential of these approaches, which have fundamentally impacted on many areas of economic analysis in recent decades, is far from exhausted. This is evinced by the contributions in this book, which draw on a variety of methodological camps and disciplines.

2 the central role of the notion of the contract
in economic analysis

Even though the notion of the contract has long been central to our understanding of the operation of decentralized social systems, especially in the tradition of the philosophie des lumieres, only recently have economists begun to render it justice. Following in the footsteps of Smith and Walras, they long based their analyses of the functioning of decentralized economies on the notions of market and price system. This application of Walrasian analysis, in which supply meets demand around a posted price, does not satisfactorily account for the characteristics of a decentralized economy (cf. Ronald Coase's chapter 2 in . . .

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