This article is about the economic analysis of contracts. For legal definitions and contract law, see Contract.
From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.
From an economic perspective, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as law and economics. One prominent application of it is the design of optimal schemes of managerial compensation. In the field of economics, the first formal treatment of this topic was given by Kenneth Arrow in the 1960s. In 2016, Oliver Hart and Bengt R. Holmström both received the Nobel Memorial Prize in Economic Sciences for their work on contract theory, covering many topics from CEO pay to privatizations. Holmström focused more on the connection between incentives and risk, while Hart on the unpredictability of the future that creates holes in contracts.[1]
A standard practice in the microeconomics of contract theory is to represent the behaviour of a decision maker under certain numerical utility structures, and then apply an optimization algorithm to identify optimal decisions. Such a procedure has been used in the contract theory framework to several typical situations, labeled moral hazard, adverse selection and signalling. The spirit of these models lies in finding theoretical ways to motivate agents to take appropriate actions, even under an insurance contract. The main results achieved through this family of models involve: mathematical properties of the utility structure of the principal and the agent, relaxation of assumptions, and variations of the time structure of the contract relationship, among others. It is customary to model people as maximizers of some von Neumann–Morgenstern utility functions, as stated by expected utility theory.
^Domonoske, Camila (10 October 2016). "It's Agreed: Nobel Prize In Economics Awarded For Contract Theory". NPR. Retrieved 2020-11-10.
rights and obligations of the parties. From an economic perspective, contracttheory studies how economic actors can and do construct contractual arrangements...
In moral and political philosophy, the social contract is an idea, theory or model that usually, although not always, concerns the legitimacy of the authority...
other party to the contract. Contracttheory is a large body of legal theory that addresses normative and conceptual questions in contract law. One of the...
parties regarding the future exchange of goods or services. Implicit contractstheory was first developed to explain why there are quantity adjustments (layoffs)...
The nexus of contractstheory is an idea put forth by a number of economists and legal commentators (most notably Michael Jensen and William Meckling as...
related to corporate social responsibility, market economy, and social contracttheory. The stakeholder view of strategy integrates a resource-based view...
society). The theory uses an updated form of Kantian philosophy and a variant form of conventional social contracttheory. Rawls's theory of justice is...
developed version of relational contracttheory, called "comprehensive contracttheory". Relational contracttheory was originally developed in the United...
In contracttheory, mechanism design, and economics, an information asymmetry is a situation where one party has more or better information than the other...
external forces like the nudge theory, and relative forces like Adams' equity theory. The concept of psychological contract became more popular among researchers...
Efficient contracttheory suggests that in a strong-form efficient market, if a contract exists, then it must be efficient due to survivorship bias. For...
philosophy, and contemporary concepts such as social contracttheory. It was used in challenging the theory of the divine right of kings, and became an alternative...
In ethics, political philosophy, social contracttheory, religion, and international law, the term state of nature describes the hypothetical way of life...
A complete contract is an important concept from contracttheory. If the parties to an agreement could specify their respective rights and duties for...
option contracts play an important role in the field of contracttheory. In particular, Oliver Hart (1995, p. 90) has shown that option contracts can mitigate...
Leviathan, in which he expounds an influential formulation of social contracttheory. He is considered to be one of the founders of modern political philosophy...
economic theory, the field of contracttheory can be subdivided in the theory of complete contracts and the theory of incomplete contracts. In contract law...
the tradition of Francis Bacon, Locke is equally important to social contracttheory. His work greatly affected the development of epistemology and political...
microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as revealed preference theory. The theory of...
but to remain on the sidelines. The author also critiques the theory of the social contract (J. Locke, T. Hobbes, J.-J. Rousseau and others), according...
reached by trading from the people's initial holdings of the two goods. contracttheory The study of how economic actors can and do construct contractual arrangements...
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its...
Decision theory (or the theory of choice) is a branch of applied probability theory and analytic philosophy concerned with the theory of making decisions...
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