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Complete Contract
A complete contract is an important concept from contract theory. If the parties to an agreement could specify their respective rights and duties for every possible future state of the world, their contract would be complete. There would be no gaps in the terms of the contract. However, because it would be prohibitively expensive to write a complete contract, contracts in the real world are usually incomplete. When a dispute arises and the case falls into a gap in the contract, either the parties must engage in bargaining or the courts must step in and fill in the gap. 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. Complete contracting theory is also called agency theory (or principal-agent theory) and closely ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Contract Theory
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 (MIT) focused more on the connectio ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bargaining
In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service debate the price or nature of a transaction. If the bargaining produces agreement on terms, the transaction takes place. Although the most apparent aspect of bargaining in markets is as an alternative pricing strategy to fixed prices, it can also include making arrangements for credit or bulk purchasing, as well as serving as an important method of clienteling. Bargaining has largely disappeared in parts of the world where retail stores with fixed prices are the most common place to purchase goods. However, for expensive goods such as homes, antiques and collectibles, jewellery and automobiles, bargaining can remain commonplace. Dickering and "haggling" refer to the same process. Where it takes place Haggling is associated commonly with bazaars and other markets where centralized regulation is difficult or impossible. Both religious beliefs an ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Default Rule
{{inline, date=June 2021 In legal theory, a default rule is a rule of law that can be overridden by a contract, trust, will, or other legally effective agreement. Contract law, for example, can be divided into two kinds of rules: ''default rules'' and ''mandatory rules.'' Whereas the ''default rules'' can be modified by agreement of the parties, ''mandatory rules'' will be enforced, even if the parties to a contract attempt to override or modify them. One of the most important debates in contract theory concerns the proper role or purpose of default rules. The idea of a default rule in contract law is sometimes connected to the notion of a complete contract. In contract theory, a complete contract fully specifies the rights and duties of the parties to the contract for all possible future states of the world. An incomplete contract, therefore, contains gaps. Most contract theorists find that default rules fill in the gaps in what would otherwise be incomplete contracts. This i ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Incomplete Contracts
In economic theory, the field of contract theory can be subdivided in the theory of complete contracts and the theory of incomplete contracts. In contract law, an incomplete contract is one that is defective or uncertain in a material respect. 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. 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 rationality (the limitations of the human mind in understanding and solving complex problems) and one cannot anticipate all possible contingencies. Or perhaps because it is too expensive to write a complete contract, the parties will opt for a "sufficiently complete" contract. In short, every contract is incomplete for a variety of reasons and limitations. The incompleteness of a contract also means that the ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Mechanism Design
Mechanism design is a field in economics and game theory that takes an objectives-first approach to designing economic mechanisms or incentives, toward desired objectives, in strategic settings, where players act rationally. Because it starts at the end of the game, then goes backwards, it is also called reverse game theory. It has broad applications, from economics and politics in such fields as market design, auction theory and social choice theory to networked-systems (internet interdomain routing, sponsored search auctions). Mechanism design studies solution concepts for a class of private-information games. Leonid Hurwicz explains that 'in a design problem, the goal function is the main "given", while the mechanism is the unknown. Therefore, the design problem is the "inverse" of traditional economic theory, which is typically devoted to the analysis of the performance of a given mechanism.' So, two distinguishing features of these games are: * that a game "designer" choos ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Implementation Theory
Implementation theory is an area of research in game theory concerned with whether a class of mechanisms (or institutions) can be designed whose equilibrium outcomes implement a given set of normative goals or welfare criteria.Palfrey, Thomas R. "Chapter 61 Implementation Theory." Handbook of Game Theory with Economic Applications, 2002. . There are two general types of implementation problems: the economic problem of producing and allocating public and private goods and choosing over a finite set of alternatives.Maskin, Eric. "Implementation Theory." Handbook of Social Choice and Welfare, 2002. . In the case of producing and allocating public/private goods, solution concepts are focused on finding dominant strategies. In his paper "Counterspeculation, Auctions, and Competitive Sealed Tenders", William Vickrey showed that if preferences are restricted to the case of quasi-linear utility functions then the mechanism dominant strategy is dominant-strategy implementable. "A social ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Adverse Selection
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expense of other parties who do not have the same information. In an ideal world, buyers should pay a price which reflects their willingness to pay and the value to them of the product or service, and sellers should sell at a price which reflects the quality of their goods and services. For example, a poor quality product should be inexpensive and a high quality product should have a high price. However, when one party holds information that the other party does not have, they have the opportunity to damage the other party by maximising self-utility, concealing relevant information, and perhaps even lying. Taking advantage of undisclosed information in an economic contract or trade of possession is known as adverse selection. This opportunity ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Moral Hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk knowing that its insurance will pay the associated costs. A moral hazard may occur where the actions of the risk-taking party change to the detriment of the cost-bearing party after a financial transaction has taken place. Moral hazard can occur under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk and has a tendency or incentive to take on too much risk from the perspective of the party with less information. One example is a principal–agent problem, where one party, called an agent, acts on behalf of another party, called the principal. If the agent has more information about his or her actions or intentions than the princ ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Revelation Principle
The revelation principle is a fundamental principle in mechanism design. It states that if a social choice function can be implemented by an arbitrary mechanism (i.e. if that mechanism has an equilibrium outcome that corresponds to the outcome of the social choice function), then the same function can be implemented by an incentive-compatible-direct-mechanism (i.e. in which players truthfully report type) with the same equilibrium outcome (payoffs). In mechanism design, the revelation principle is of utmost importance in finding solutions. The researcher need only look at the set of equilibria characterized by incentive compatibility. That is, if the mechanism designer wants to implement some outcome or property, they can restrict their search to mechanisms in which agents are willing to reveal their private information to the mechanism designer that has that outcome or property. If no such direct and truthful mechanism exists, no mechanism can implement this outcome/property by ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Incomplete Contracts
In economic theory, the field of contract theory can be subdivided in the theory of complete contracts and the theory of incomplete contracts. In contract law, an incomplete contract is one that is defective or uncertain in a material respect. 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. 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 rationality (the limitations of the human mind in understanding and solving complex problems) and one cannot anticipate all possible contingencies. Or perhaps because it is too expensive to write a complete contract, the parties will opt for a "sufficiently complete" contract. In short, every contract is incomplete for a variety of reasons and limitations. The incompleteness of a contract also means that the ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Theory Of The Firm
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 existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as Transaction cost theory, Managerial economics and Behavioural theory of the firm will allow for an in-depth analysis on various firm and management types. Overview In simplified terms, the theory of the firm aims to answer these questions: # Existence. Why do firms emerge? Why are not all transactions in the economy mediated over the market? # Boundaries. Why is the boundary between firms and the market located exactly there in relation to size and output variety? ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
