Efficient contract theory suggests that in a strong-form efficient market, if a contract exists, then it must be efficient due to

survivorship bias Survivorship bias or survival bias is the logical error of concentrating on entities that passed a selection process while overlooking those that did not. This can lead to incorrect conclusions because of incomplete data. Survivorship bias is ...

. For example, the

initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...

market in the United States has an

underwriting spread The underwriting spread is the difference between the amount paid by the underwriting group in a new issue of securities and the price at which securities are offered for sale to the public. It is the underwriter's gross profit margin, usually expr ...

of approximately 7% in the majority of cases despite some offerings being of differing size or difficulty. Some argue that this cannot reflect the true costs to the

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

, as it does not account for

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...

that the bank would no doubt benefit from for larger deals. Efficient contract theory would suggest that given the investment banking market is competitive and there is freedom of entry and exit, 7% must be an efficient contract otherwise it would not exist.Bruce R Lyons "Empirical Relevance of Efficient Contract Theory: Inter-firm Contracts" ''Oxford Review of Economic Policy,'' 1996, vol. 12, issue 4, 27-52 While the phrase "efficient contract" is in widespread use as a non-defined term, the defined-term as described above has only been used by Bruce Lyons in a paper from 1996.

References

Efficient-market hypothesis Perfect competition {{microeconomics-stub