Contractual Chains and Related Work

University Of California-San Diego, La Jolla CA

Investigators

Abstract

This project examines the economic theory of settings in which multiple parties first establish externally enforced contracts and then engage in productive interaction. The contracts specify monetary transfers as a function of the productive outcome. The parties are unable to contract as a large group and must instead establish contracts in bilateral relationships. The feasible contractual relationships are given by a network of links. Because a given agent may not be able to contract directly with another whose productive action he case about, there are externalities due to lack of direct links. The project entails developing a general model and determining whether economically efficient outcomes can be achieved through endogenously formed contractual chains. The PI explores how features of the contracting institutions (such as the legal environment) help or hinder the internalization of externalities. This includes the analysis of cases in which the parties seek to optimally share risk. This research will lead new insights into a variety of real world situations, including the internal organization of firms, the sale of 'network' goods, private provision of public goods, commons problems, and risk-sharing arrangements. The results will give new insights for contract law, in particular the degree to which courts should give parties the flexibility to create or cancel contracts in response to developments in their other contractual arrangements. Broader impacts also include the interdisciplinary impact on environmental studies; the PI collaborates with a broad group of scholars on questions of resource management, strategic planning, negotiations, and public policy.