The Impact of Incomplete Contracts on Economics

The book collects the presentations and discussions made at the conference celebrating the 25th anniversary of the publication of “Grossman and Hart (1986).1 The conference brought together scholars who, in different fields, have used and explored Grossman and Hart’s key insights. The collection of these essays represents a unique up-to-date analysis of the broad set of applications of the incomplete contract framework. The GH framework was developed to answer a somewhat naive but fundamental question, raised by Ronald Coase in 1932 during his undergraduate studies: if the market is an efficient method of resource allocation, then why do so many transactions take place within firms? There was no model at the time to address this question. Coase (1937) relied on informal arguments for the existence of firms, particularly emphasizing haggling problems in decentralized market transactions, which he thought authority within firms could partly overcome. In other words, firms exist because there are costs to using the price mechanism: prices must become known, bargains must be made, contracts must be written.

Oxford University Press