Theoretical Isolation in Contract Theory: Suppressing Margins and Entrepreneurship

Kirsten Foss and Nicolai Foss ()

No 00-4, IVS/CBS Working Papers from Department of Industrial Economics and Strategy, Copenhagen Business School

Abstract: We discuss contract theory from a combined Austrian/new institutional view. In the latter view, the world is seen as shot through with ignorance and transaction costs, but, as a tendency, entrepreneurial activity responds to the problems caused by these. All modeling must critically reflect this. This ontological commitment is contrasted to various isolations characteristic of contract theory, specifically the modeling strategy of introducing often ad hoc and unexplained constraints that suppress margins and possibilities of entrepreneurial actions that would be open to real-world decision-makers. We illustrate this by means of, for example, the treatment of asymmetric information under complete contracting and the notion of control rights under incomplete contracting.

Keywords: Contract theory; new institutional economics; Austrian economics; entrepreneurship (search for similar items in EconPapers)
JEL-codes: B41 C70 D23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
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Journal Article: Theoretical isolation in contract theory: suppressing margins and entrepreneurship (2001)
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