The PI will develop a new approach that uses economic theory to analyze contracts and agreements. The resulting theory will help us to better understand how firms organize themselves and carry out their activities
Lawyers and economists have traditionally thought of a contract as providing parties with rights and obligations. These rights and obligations may be clearly spelled out (complete contracts) or not so clearly spelled out (incomplete contracts). However, in some cases it may be more useful to think of a contract as an indefinite agreement or agreement to agree. For example, suppose that a conference organizer approaches someone to be a keynote speaker in an event a year hence. The parties might agree on the speaker's fee now, but leave the topic of the speech to be determined later. This agreement is probably not legally binding, but may have value because, in effect, the parties have agreed not to negotiate later about the fee (which has already been set). In other words, the force of the agreement comes from what is ruled out (further bargaining about the fee) rather than from what is ruled in (the particular topic of the speech).
In work already developed, the PI has used this approach to explore the trade-off between ex ante incentives and ex post efficiency. This award funds work that will apply the same approach to understanding the internal organization of the firm. The approach seems well suited to this purpose since employment contracts traditionally have the form that an employee's wage is fixed in advance, while the employee's task is decided later.
This research will throw light on a number of important issues. It will help to explain why parties often deliberately write vague and incomplete contracts, and why contracts are short-term rather than long-term. It will throw new light on why much negotiation inside organizations occurs on dimensions other than wages (wages are fixed in advance, other things are not). The results will also provide a new perspective on the motives for corporate mergers. To the extent that the approach explains rigid (real) wages, it may elucidate the reasons for Keynesian-type unemployment.
