In a pioneering approach towards the explanation of the phenomenon of "yes man" behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off...

This paper provides a non-technical discussion of the incomplete contracting approach to the theory of the firm developed by Grossman and Hart (1986). This approach offers an answer to the questions regarding the boundaries of the firm first raised by Coase (1937).

The theory of contracts is one of the most active research areas in economics. While classic contract theory failed to account for institutions such as property rights and authority, the theory of incomplete contracts has overcome these conceptual problems and produced a variety of interesting...

In this paper we discuss "lock in effects" and "hold-up problems" (which occur when relationship-specific investments are sunk).

This paper offers a non-technical discussion of the literature on the theoretical foundations of the incomplete contracting approach.

Consider a government and a non-governmental organization (NGO) who can collaborate to provide a public good using physical assets. Who should be the owner of the assets if the NGO can make non-contractible investments? In the literature it has been argued that whoever has a larger valuation of...

In this paper it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a 'simple' contract that the parties have...

A buyer and a seller can exchange one unit of an indivisible good. While producing the good, the seller can exert unobservable effort (hidden action). Then the buyer realizes whether his valuation is high or low, which stochastically depends upon the seller's effort level (hidden information)....

Consider a research lab that owns a patent on a new technology but cannot develop a marketable final product based on the new technology. There are two downstream firms that might successfully develop the new product. If the downstream firms' benefits from being the sole supplier of the new...

When two parties invest in human capital and at the same time decide on know-how disclosure it can be shown that joint ownership with veto power is the optimal ownership structure, given that only incomplete contracts can be written.