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Contract theory in economics began with 1991 Nobel Laureate Ronald H. Coase's 1937 article "The Nature of the Firm". Coase notes that "the longer the duration of a contract regarding the supply of goods or services due to the difficulty of forecasting, then the less likely and less appropriate it is for the buyer to specify what the other party should do."
The concept of asset specificity is closely related to that of opportunism. Classical economists assume the existence of the "perfectly rational economic man". Previous approaches to economics often assumed that two contractually bounded firms will stick to the contract as they are supposed to.
One important example is a paper by Paul L. Joskow, "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets", in American Economic Review, March 1987. The incomplete contracts approach to the theory of the firm and corporate finance is partly based on the work of Williamson and Coase.
If a firm operated internally under the market system, many contracts would be required (for instance, even for procuring a pen or delivering a presentation). In contrast, a real firm has very few (though much more complex) contracts, such as defining a manager's power of direction over employees, in exchange for which the employee is paid.
The Taylor contract came as a response to results of new classical macroeconomics, in particular the policy-ineffectiveness proposition proposed in 1975 by Thomas J. Sargent and Neil Wallace [3] based upon the theory of rational expectations, which posits that monetary policy cannot systematically manage the levels of output and employment in the economy and that monetary shocks can only give ...
[12] [13] Taken together, whether or not suitable contracts can solve the hold-up problem is disputed in contract theory. [14] In an experimental study, Hoppe and Schmitz (2011) found that option contracts may alleviate the hold-up problem even when renegotiation is possible, which may be explained by Hart and Moore's (2008) idea that contracts ...
An economic system, or economic order, [1] is a system of production, resource allocation and distribution of goods and services within a society. It includes the combination of the various institutions , agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.
Operation and maintenance contract (O & M) A private economic agent, under a government contract, operates a publicly-owned asset for a specific period of time. Formal, ownership of the asset remains with the public entity. In terms of private-sector risk and involvement, this model is on the lower end of the spectrum for both involvement and risk.