Contract Economics.

• Author: Windsor, Duane

This book is mandatory reading in economic contract theory and the new economic institutionalism. The indexed volume is the proceedings of a 1990 Nobel Foundation symposium. It consists of nine commissioned papers each with one or two comments, a set of three concluding panel comments (by Coase, Hall and Hart), and an introduction by the editors. The authors and commentators are the leading figures in this field. The paper references constitute jointly a good basic guide to the literature. The book is not highly technical in exposition, although the authors presuppose a general working knowledge of the field. The book can be read, carefully, by undergraduates with such a knowledge.

There is not space here for a detailed examination of each paper's arguments. The caliber of the participants is sufficient warranty of quality. Chapter 2, by Guesnerie (comments by Werin), investigates the implications of contracting theory for the Arrow-Debreu general equilibrium paradigm. He concludes that moral hazard and adverse selection cause more complex contracts and strategies; research into these considerations could lead to "significant revisions of the ways economists perceive equilibrium." Chapter 3, which is by Cheung (comments by Becker and Coase), argues the case for the new institutional economics in terms of contracts, government and transaction costs. Schwartz, in chapter 4, with comments by Tirole, is critical of both legal and economic contract theories of incomplete contracts.

Chapter 5, by Townsend (comments by Alchian and Eggertsson), is an intriguing application of the Arrow-Debreu paradigm to village and regional economies. He concludes that rural villages handle shocks through extended-family consumption smoothing and risk hedging in the form of fragmented land holding. These strategies are interpreted as insurance contracts. In chapter 6, Klein (comments by Meckling and Moore) argues that principal-agent and mechanism-design approaches cannot explain most long-term contracts. He sees a two-stage contracting process in which the first stage covers self-enforcing expectations and the second stage emphasizes risk of losing capital or reputation.

In chapter 7, Rosen, with comments by Holmstrom, explores the importance of promotion as an executive incentive, Chapter 9, by Jensen and Meckling (comments by Demsetz and Williamson), interprets organizational structure in terms of information and control costs. Jensen and Meckling see the firm...