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Institutions, Contracts and Organizations

Institutions, Contracts and Organizations

Perspectives from New Institutional Economics

Edited by Claude Ménard

This outstanding book presents new original contributions from some of the world’s leading economists including Ronald Coase, Douglass C. North, Masahiko Aoki, Oliver E. Williamson and Harold Demsetz. It demonstrates the extent and depth of the New Institutional Economics research programme which is having a worldwide impact on the economics profession.

Chapter 17: Enforcement procedures and governance structures: what relationship?

Claude Ménard

Subjects: economics and finance, industrial organisation, institutional economics


Claude Ménard* INTRODUCTION Analysis of contractual arrangements plays a highly important role in recent theoretical developments in economics. The centrality of contracts in understanding the diversity of institutional arrangements began in the research program initiated by Coase (1937, 1960) and implemented by new institutional economics, and is now widespread throughout economic literature. There are two primary approaches to the analysis of contracts. The first, well illustrated by the theory of complete contracts, emphasizes the formal analysis of contracts; in particular, determining conditions that would be required for an optimal contract, that is, one that could be fundamentally selfenforcing. Theorists of this approach focus primarily on ex ante factors, that is, on the a priori conditions that clauses must meet for a contract to be efficient. The second approach considers most contracts as incomplete, so that their implementation and enforcement necessitate devices for filling in the blanks and for imposing external constraints on the partners involved. This is the view developed by, among others, Williamson (1985, ch. 2, section 3), who emphasized the differences between ex ante and ex post conditions: if agreements are reached that allow the development of complementary assets, unanticipated circumstances arising ex post can open the possibility for opportunistic behavior, making enforcement difficult and pushing partners towards adjustments or conflicts. In this process, the institutional embeddedment of contracts becomes a central issue. The purpose of this chapter is to explore further certain characteristics of enforcement procedures and their relationship to governance structures, in...

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