Contract Theory and Property Rights
Ugo Pagano
2000/01Fall (Economics)
The purpose of this course is to consider the economic theories that can help us to explain the different institutional mixes that characterize modern capitalist economies and the alternative patterns of transition of the former socialist economies
Ever since Coase's question economics had to face the problem that, within the framework of a market economy, organizations like firms develop and prosper. If this happens, these organizations must sometimes have some advantages relatively to market-type organization. In general, a plurality of organizations characterizes each modern industrial economy and the organizational mix is different in each one of them.
Under positive transaction costs contracts are likely to be incomplete. Contract theory and, in particular, the study of incomplete contracts provide a framework that helps to explain why alternative allocation of property rights matter for efficiency. Moreover, they give us an interesting "second best" definition of efficient property rights that is missing in the first best world of standard economic theory.
However, market economies do not seem to bring about a unique "second best" efficient solution and explaining the diversity of the institutions of production is perhaps the fundamental task of the theory of industrial organization. Organizations are often characterized by strong complementarities : the performance of each organization depends on the existence of other organizations. In many cases organizational efficiency cannot be unambiguously defined and multiple organizational equilibrium may well be possible in theory as well as in reality.
This "diversity" of advanced market economy is not perceived by traditional neo-classical economics which has seen transition as an unambiguous process from a single form of socialism to a single form of a market economy.
The final part of the course considers those theories that have taken into account the complexity of institutions and/or the path-dependency of institutional change. We will try to use these theories to explain the diversity of economic institutions in the West and that emerging among the new market economies of Central and Eastern Europe.
Mandatory Readings
1.  Aoki M. (1995) Controlling Insider Control: Issues of Corporate Governance in Transition Economies. In Aoki M. and Kim Hyung-Ki. Corporate Governance in Transitional Economies. . EDI Development Studies, The World Bank, Washington.
2.  Bolton P., Scharfstein D. S. (1998) Corporate Finance, the Theory of the Firm, and Organisations. The Journal of Economic Perspectives V. 12 pp. 95 -115.
3.  Coase R. H. (1988) The Firm, the Market and the Law. The University of Chicago Press. Chicago and London.
4.  Demsetz H. (1988) Ownership, Control and the Firm. The Organisation of Economic Activity. Vol. I. Blackwell, Oxford.
5.  Hart O. (1995) Firms Contracts and Financial Structure. Clarendon Press, Oxford.
6.  Hart O., Moore J. (1999) Foundations of Incomplete Contracts. Review of Economic Studies V. 66 pp 115-138.
7.  Holmstrom B., Roberts J. (1998) The Boundaries of the Firm Revisited. The Journal of Economic Perspectives V. 12 pp. 73-95.
8.  Maskin E., Tirole J. (1999) Unforeseen Contingencies and Incomplete Contracts. Review of Economic Studies, V. 66 p. 83 -114.
9.  Milgrom P., Roberts J. (1992) Economics, Organisation and Management. Prentice-Hall International Editions.
10.  Nelson R.. (1995), Recent Evolutionary Theorizing About Economic Change, Journal of Economic Literature, vol. 33, pp. 48-90.
11.  Pagano U..(1991) Property Rights, Asset Specificity, and the Division of Labour under Alternative Capitalist Relations. Cambridge Journal of Economics, Vol. 15 No 3, pp. 315-342. Reprinted in G. Hodgson (1993) The Economics of Institutions. Edward Elgar, Cheltenham.
12.  Pagano U. (1992) Authority, Co-ordination and Disequilibrium: an Explanation of the Co-existence of Markets and Firms. Economic Dynamics and Structural Change. June 1992. Reprinted in G. Hodgson (1993) The Economics of Institutions. Edward Elgar, Cheltenham.
Pagano U., Rowthorn R. eds. (1996) The Competitive Selection of Democratic Firms in a World of Self-Sustaining Institutions in Democracy and Efficiency in the Economic Enterprise. Routledge London and New York.
13.  Pagano U. (2000) Transition and the speciation of the Japanese model. In Fabel F., Farina F., Punzo F. European Economies in Transition. Structural changes in Search of a New Growth Path. MacMillan, London.
14.  Pagano U. (2000) The Origin of Organizational Species. Forthcoming in Nicita A, Pagano U eds. The Evolution of Economic Diversity, Routledge, London.
15.  Pagano U. (2000) Public Markets, Private Orderings and Public Governance. Mimeo, Siena.
Williamson O. E. (1985) The Economic Institutions of Capitalism. The Free Press, New York.
The parts of these readings that are required for the final examination will be indicated during the lectures. Students are encouraged to give short seminars on topics related to the course; the essays presented will be considered for the final evaluation. Part 1 can be taken independently of Part 2.