Institutions, Contracts and Organizations
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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.
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Chapter 25: When incomplete contract theory meets transaction cost economics: a test

Stéphane Saussier


Stéphane Saussier* INTRODUCTION In their seminal article, Grossman and Hart (1986) focussed on incomplete contract theory with explicit reference to transaction cost economics. Indeed, they aimed to formalize the ‘intuitions’ they found in this analytical framework. Since then, tremendous progress has been made so that incomplete contract theory is now considered as one of the main contract theories. We shall not discuss the success of incomplete contract theory although it has raised fundamental issues (for good critiques, see Tirole 1999, Masten 1999 and Maskin and Tirole 1999; for good rejoinders, see Hart 1995 and Hart and Moore 1999). Rather, we shall argue that incomplete contract theory cannot be viewed as a perfect formalized version of the propositions of the transaction cost economics framework. Differences still exist and are explained by the fact that these two theoretical frameworks do not rely on the same assumptions (Kreps 1996; Brousseau and Fares ch. 26 in this book). These differences have direct consequences on the way contractual relationships are viewed (Williamson, 1996). Surprisingly, very little has been written on this subject. Moreover, very little has been done to test incomplete contract theory’s propositions regarding contractual relationships (Salanié 1997, p. 191) or to compare these two analytical frameworks. In this chapter, we shall formulate a test for making such a comparison. The chapter is organized as follows. In the next section, we look at the main differences between incomplete contract theory and transaction cost economics regarding the analysis of contractual relationships. We argue that...

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