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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."
Also, a typical loan contract is just like an employment contract illustrated in the model above: the loan repayment is fixed in all states of nature as long as the borrower is solvent. Hence naturally, economists tried to extend and apply the implicit contract theory to explain these phenomena in the capital market.
A complete contract in economic theory means a contract which provides for the rights, obligations and remedies of the parties in every possible state of the world. [1] However, since the human mind is a scarce resource and the mind cannot collect, process, and understand an infinite amount of information, economic actors are limited in their ...
In economics, the freedom of contract has been studied in the field of contract theory. According to the Coase Theorem, the freedom of contract is beneficial in the absence of transaction costs. When two rational parties voluntarily enter into a contract, they must be (at least weakly) better off than in the absence of the contract.
Relational contract theory was originally developed in the United States by the legal scholars Ian Roderick Macneil and Stewart Macaulay. According to Macneil, the theory offered a response to the so-called "The Death of Contract" school’s nihilistic argument that a contract was not a fit subject for study as a whole; each different type of contract (e.g., sales, employment, negotiable ...
The idea of a complete contract is closely related to the notion of default rules, e.g. legal rules that will fill the gap in a contract in the absence of an agreed upon provision. In economics, the field of contract theory can be subdivided into the theory of complete contracts and the theory of incomplete contracts. [1]
Agency theory: dilemmas connected to making decisions on behalf of, or that impact, another person or entity. Contract theory: ways economic actors use to construct contractual arrangements, generally in the presence of asymmetric information. Notable theorists and contributors in the field of organizational economics: [1] [2] [3]
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 ...