Topics in Incomplete Contracts

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Incomplete contract theory is gradually becoming accepted as a useful way to understand the nature of organizations. This project aims to extend work in this area in three ways. First, I wish to understand better the nature of hierarchies. Much of economic activity is structured hierarchically. That is, if a senior person and junior person disagree about what should be done in an organization, the senior person gets his or her way. Why is this? To what extent is it efficient? Given a hierarchical structure, who should be senior? For example, if one person has the job of coordinating activities and somebody else has a more specialist task, is it necessarily the case that the coordinator should be senior to the specialist? Second, I am interested in the foundations of contractual incompleteness. Everyone accepts that the contracts people write are incomplete, but there is less agreement about the reason for this or the implications of contractual incompleteness. One way contracts are "completed" in reality is through the allocation of ownership rights: an owner of an asset can make decisions about the asset which an incomplete contract leaves open, and this fills out the contract. But is ownership an efficient way of completing contracts? Are there any other, more subtle, ways of allocating decision rights in organizations than through ownership? Finally, I intend to study procedures for changing management or obtaining control in publicly traded corporations. In particular, I wish to compare three mechanisms: (1) a proxy fight; (2) a takeover bid; and (3) a combination of (1) and (2). I believe that combining proxy fights and takeovers can overcome some of the inefficiencies that each mechanism exhibits by itself.