Download Contract Theory and Property Rights

Contract Theory and Property Rights
Ugo Pagano
2000/01 Fall (Economics)
The purpose of this course is to consider the economic theories that can help us to explain
the different institutional mixes that characterize modern capitalist economies and the
alternative patterns of transition of the former socialist economies
Ever since Coase's question economics had to face the problem that, within the framework
of a market economy, organizations like firms develop and prosper. If this happens, these
organizations must sometimes have some advantages relatively to market-type organization.
In general, a plurality of organizations characterizes each modern industrial economy and
the organizational mix is different in each one of them.
Under positive transaction costs contracts are likely to be incomplete. Contract theory and,
in particular, the study of incomplete contracts provide a framework that helps to explain
why alternative allocation of property rights matter for efficiency. Moreover, they give us
an interesting "second best" definition of efficient property rights that is missing in the first
best world of standard economic theory.
However, market economies do not seem to bring about a unique "second best" efficient
solution and explaining the diversity of the institutions of production is perhaps the
fundamental task of the theory of industrial organization. Organizations are often
characterized by strong complementarities : the performance of each organization depends
on the existence of other organizations. In many cases organizational efficiency cannot be
unambiguously defined and multiple organizational equilibrium may well be possible in
theory as well as in reality.
This "diversity" of advanced market economy is not perceived by traditional neo-classical
economics which has seen transition as an unambiguous process from a single form of
socialism to a single form of a market economy.
The final part of the course considers those theories that have taken into account the
complexity of institutions and/or the path-dependency of institutional change. We will try to
use these theories to explain the diversity of economic institutions in the West and that
emerging among the new market economies of Central and Eastern Europe.
Mandatory Readings
1. Aoki M. (1995) Controlling Insider Control: Issues of Corporate Governance in
Transition Economies. In Aoki M. and Kim Hyung-Ki. Corporate Governance in
Transitional Economies. . EDI Development Studies, The World Bank, Washington.
2. Bolton P., Scharfstein D. S. (1998) Corporate Finance, the Theory of the Firm, and
Organisations. The Journal of Economic Perspectives V. 12 pp. 95 -115.
3. Coase R. H. (1988) The Firm, the Market and the Law. The University of Chicago
Press. Chicago and London.
4. Demsetz H. (1988) Ownership, Control and the Firm. The Organisation of
Economic Activity. Vol. I. Blackwell, Oxford.
5. Hart O. (1995) Firms Contracts and Financial Structure. Clarendon Press, Oxford.
6. Hart O., Moore J. (1999) Foundations of Incomplete Contracts. Review of
Economic Studies V. 66 pp 115-138.
7. Holmstrom B., Roberts J. (1998) The Boundaries of the Firm Revisited. The Journal
of Economic Perspectives V. 12 pp. 73-95.
8. Maskin E., Tirole J. (1999) Unforeseen Contingencies and Incomplete Contracts.
Review of Economic Studies, V. 66 p. 83 -114.
9. Milgrom P., Roberts J. (1992) Economics, Organisation and Management. PrenticeHall International Editions.
10. Nelson R.. (1995), Recent Evolutionary Theorizing About Economic Change,
Journal of Economic Literature, vol. 33, pp. 48-90.
11. Pagano U..(1991) Property Rights, Asset Specificity, and the Division of Labour
under Alternative Capitalist Relations. Cambridge Journal of Economics, Vol. 15
No 3, pp. 315-342. Reprinted in G. Hodgson (1993) The Economics of Institutions.
Edward Elgar, Cheltenham.
12. Pagano U. (1992) Authority, Co-ordination and Disequilibrium: an Explanation of
the Co-existence of Markets and Firms. Economic Dynamics and Structural Change.
June 1992. Reprinted in G. Hodgson (1993) The Economics of Institutions. Edward
Elgar, Cheltenham.
Pagano U., Rowthorn R. eds. (1996) The Competitive Selection of Democratic
Firms in a World of Self-Sustaining Institutions in Democracy and Efficiency in the
Economic Enterprise. Routledge London and New York.
13. Pagano U. (2000) Transition and the speciation of the Japanese model. In Fabel F.,
Farina F., Punzo F. European Economies in Transition. Structural changes in Search
of a New Growth Path. MacMillan, London.
14. Pagano U. (2000) The Origin of Organizational Species. Forthcoming in Nicita A,
Pagano U eds. The Evolution of Economic Diversity, Routledge, London.
15. Pagano U. (2000) Public Markets, Private Orderings and Public Governance.
Mimeo, Siena.
Williamson O. E. (1985) The Economic Institutions of Capitalism. The Free Press,
New York.
The parts of these readings that are required for the final examination will be indicated
during the lectures. Students are encouraged to give short seminars on topics related to the
course; the essays presented will be considered for the final evaluation. Part 1 can be taken
independently of Part 2.