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The Impact of Incomplete Contracts on Economics

Edited Book
Philippe Aghion, Mathias Dewatripont, Patrick Legros, Luigi Zingales
Oxford University Press

The 1986 article by Grossman and Hart “A Theory of Vertical and Lateral Integration” has provided a framework for understanding how firm boundaries are defined and how they affect economic performance. The property rights approach has provided a formal way to introduce incomplete contracting ideas into economic modeling.

The Impact of Incomplete Contracts on Economics collects papers and opinion pieces on the impact that this property right approach to the firm has had on the economics profession. It shows that the impact has been felt sometimes in significant ways in a variety of fields, ranging from the theory of the firm and their internal organization to industrial organization, international trade, finance, management, public economy, and political economy and political science. Beyond acknowledging how the property rights approach has permeated economics as a whole, the contributions in the book also highlight the road ahead—how the paradigm may change the way research is performed in some of the fields, and what type of research is still missing. The book concludes with a discussion of the foundations of the property rights, and more generally the incomplete contracting, approaches and with a series of contributions showing how behavioral considerations may provide a new way forward.

The Nobel Prize: What is mechanism design and why does it matter for policy-making?

Web Article
Estelle Cantillon, Patrick Legros
VOX Column, 18 October 2007

Mechanism design theory is a major breakthrough in the modern economic analysis of institutions and markets. It revolutionalised the way economists think about optimal institutions and regulation when governments don’t “know it all.” It has had a major impact on current policy-making and will continue to do so in the future.

Link to Vox column

Auction House Settlements - Winning Twice?

Newspaper Article
Orley Ashenfelter, Victor Ginsburgh, Kathryn Grady, Patrick Legros, Nicholas Sahuguet
The Art Newspaper, N° 141, November 2003

Adverse Selection and Contracts: a Discussion

Book Chapter
Patrick Legros

Discussion of the papers by Rochet and Stole “The Economics of Multidimensional Screening” and by Chiappori and Salanié “Testing Contract Theory: a Survey of Some Recent Work” that were presented at the World Congress of the Econometric Society in 2000.


Download the PDF file .

Interference Contracts and Authority with Insecure Communication

mimeoWorking Paper
Patrick Legros, Andrew Newman
mimeo ECARES

We develop a theory of mechanism design when agents are able to interfere with each others communication channels. We develop a kind of revelation principle — the noninterference principle — which permits representation of arbitrary mechanisms by direct ones the incentives to interfere will depend on the mechanism chosen interference thus constrains contractual design. For instance authority emerges as a governance mechanism which may economize on the costs of securing channels particularly when the organization needs to be flexible and there is diversity in its members preferences. We also show that there are environments in which the possibility of interference actually facilitates full implementation by providing a means of protest in undesired equilibria.


[PDF upon request]

Strongly Durable Allocations

mimeoWorking Paper
Patrick Legros
mimeo, 1990

I define a new concept of stability for allocations which i call strong durability. A pair consisting of a mechanism and a bayesian equilibrium is strongly durable if for any alternative mechanism and for any sequential equilibrium of the voting game between the two mechanisms the interim utility payoffs of the players in the sequential equilibrium are less than or equal to those obtained in the bayesian equilibrium of the initial mechanism. An allocation is strongly durable if there exists a strongly durable pair that implements this allocation. Strong durability is defined with respect to a class of mechanisms; strong durable allocations are necessarily focally implemented, i.e., there exists a mechanism and an equilibrium of this mechanism that implement that allocation and the given equilibrium interim dominates all the other equilibria of the mechanism. In fact, under a regularity condition, it can be shown that at most one type can be mde worse off in any other equilibrium of the mechanism in the special case of independent values and independent types. If any type of mechanism can be used then strong durability is equivalent to interim efficiency.



(PDF upon request)