'Reference Points' and the Theory of the Firm : An Introduction

There is a small but growing literature on the theory of the firm based around the "reference point" theory of (incomplete) contracts formulated in Hart and Moore (2008). The reference point approach has been applied to the theory of the firm in Hart (2008, 2009), Hart and Moore (2007) and Hart and Holmstrom (2010). This survey reviews the theoretical aspects of each of these papers in turn. It then discusses the relationship between the reference point approach to the firm, the transaction cost approach and the property rights approach. Here it is argued that the reference point approach is a step back towards ex post inefficiencies, away from reliance on ex ante inefficiencies