Economic Contract Theory Research Articles

The Dilution of Rights as a Stage in the Development of the Institution of Property

The work is devoted to the consideration of two trends in the development of property relations – the trend towards greater specification of individual rights, which is characteristic of the market economy model, and the trend of dilution of rights and incompleteness of obligations that is typical for the network model of relations. For a long time, the prevailing point of view in economic research was that a high certainty of property rights is a necessary condition for the effective development of the economy. The article presents the main arguments of the supporters of this position. At the same time, within the framework of the new institutional theory, the two trends casting doubt on this postulate emerged – the theory of property regimes and the economic theory of contracts. The article justifies that under certain conditions strict certainty of property rights may create some barriers to improving the efficiency of economic interaction. Such ways of organizing economic interaction as cooperation and partnership can be based on a system of implicit expectations, which are a classic example of a fuzzy specification of rights and obligations. The authors note that the dilution of rights is characteristic not only for a stationary state – the determination of rules for accessing resources, the order of its use, and the order of changing both of them. The dynamic perspective of the property problem is no less important – the dilution of obligatory rights associated with contractual relations. In real practice incomplete contracts characterized by a fuzzy specification of mutual rights and obligations are common. Thus, in the modern economy, a fuzzy specification of rights is characteristic of both the static (property rights) and dynamic (obligatory rights) aspects of the distribution of rights and obligations.

Market and Regulatory Coefficients for Determining the Rent for Public Land in Regions

As opposed to international studies, Russian scientists apply multifactorial models with specific coefficients to determine the rent for public lands. This research analyses and summarises the existing theoretical and normative approaches to coefficient calculation covered by domestic literature. We examine two types of coefficients: permitted use of land (K) and categories of land users (K 1 ). Based on the property valuation theory (income and comparative approaches), we demonstrated problems and disadvantages of the methods currently used to determine K and K 1 coefficients. Then, using the economic contract theory, we identified market and non-market (hybrid and hierarchical) regulation mechanisms and distinguished K and K 1 coefficients. Institutional differences of these indicators were theoretically substantiated. As a result, we developed economic algorithms for calculating market (K) and regulatory (K 1 ) coefficients that take into account both types of permitted use of land (for K) and categories of land users (for K 1 ) by considering preferences and restrictions in the field. The elaborated methodology was tested by performing complex calculations, which allowed us to obtain the values of K and K 1 coefficients for 18 local councils located in Pervomaysky District of Altai Krai for 112 types of permitted use of land. Proposed methodological recommendations can be applied for developing municipal programmes in Russia and abroad to increase the effectiveness and transparency of public land rent.

Are All Colonies Created Equal? The Role of Honey Bee Colony Strength in Almond Pollination Contracts

This paper examines how honey bee population dynamics, the scale and timing of almond bloom, and unmarketability of almond honey interact to create misaligned incentives for growers and beekeepers in the California almond pollination services market. We combine economic contract theory with data from the first pollination contract survey to examine the design of pollination contracts. 89.2% of respondents used contracts with minimum colony population requirements, suggesting that all colonies are not considered to be equal providers of pollination services. Contracts that involved enforcement every year provided the highest pollination fees on average, while those with no enforcement provided the lowest fees. We contribute to the literature regarding pollination services by demonstrating that the number of hives and price per hive present an incomplete picture of almond pollination transactions without information regarding colony strength requirements and enforcement. We also provide a theoretical rationale for why almond pollination agreements have anecdotally become more formal over time: as the marginal value of colony strength increases, the grower offers the beekeeper stronger incentives to provide high colony strength. California almond production is an extreme case of a crop relying almost solely on managed pollinators, but ultimately could reflect the future for many pollinator-dependent crops if pollinator populations continue to decrease while monoculture crop production increases.

THEORY OF CONTRACTS IN THE LIGHT OF NEW INSTITUTIONAL ECONOMICS. THE SPECIFICITY OF AGRICULTURAL CONTRACTS

The article reviews Polish and foreign economic literature regarding new institutional economics (NIE) and various research approaches used in the framework of NIE. Particular attention was paid to the economic theory of contracts and the transaction costs, as the limitation of transaction costs is indeed the main stimulus for contract signing. Special attention was given to agricultural contracts and their specificity. The article discusses different theories applied in the analysis of contracts, characterizes contracts according to different criteria, and draws attention to the importance of transaction costs in the theory of contracts. In addition, factors which contribute to these costs have been identified, indicating the necessity of adapting the principles of transaction cost economics to the needs of the agricultural sector.

A contract theory approach to special and differential treatment and the WTO

PurposeThis paper is prompted by the dissatisfaction of developing countries regarding the grant of special and differential treatment (SDT) under the legal framework of the World Trade Organisation (WTO). As a result of such dissatisfaction, the Doha Round of multilateral trade negotiations explicitly called for a review of such treatment with a view to making it more precise, effective and operational. This mandate has not yet been met to the satisfaction of many developing countries. This paper aims to provide an alternative way of examining and evaluating the contestation which exists regarding SDT in the WTO.Design/methodology/approachThis paper uses the conceptual framework provided by the economic contract theory and in particular, the concept of the incomplete contract to provide a scaffold for analysing SDT. This approach is intended to offer insights beyond those elucidated so far in the literature on the topic.FindingsThis paper, by using an economic contract theory approach, finds that SDT is constructed as an incomplete contract. Furthermore, the suboptimal outcomes associated with incomplete contracts are apparent in the constitution of SDT. This finding is useful in both an evaluative and programmatic sense, providing us with an alternative entry point to explain some of the shortcomings with SDT, as well as garnering us with a useful conceptual tool to think upon how SDT can be improved.Originality/valueThe paper contributes to the literature on SDT within the WTO in particular and differential treatment in international law in general. Drawing on literature on the WTO as an incomplete contract, the paper provides an original frame for analyzing SDT and draws attention, in particular, to the utility of the economic contract theory as a programmatic and evaluative frame for SDT and differential treatment more generally.

The Relationship between Copyright and Contract Law

Contracts lie at the heart of the regulatory system governing the creation and dissemination of cultural products in two respects: (1) The exclusive rights provided by copyright law only turn into financial reward, and thus incentives to creators, through a contract with a third party to exploit protected material. (2) From a user perspective purchases of protected material may take the form of a licensing contract, governing behaviour after the initial transaction. Thus, a review of the relationship between copyright and contract law has to address both supply- and demand-side issues. On the supply side, policy concerns include whether copyright law delivers the often stated aim of securing the financial independence of creators. Particularly acute are the complaints by both creators and producers that they fail to benefit from the exponential increase in the availability of copyright materials on the Internet. On the demand side, the issue of copyright exceptions and their policy justification has become central to a number of reviews and consultations dealing with digital content. Are exceptions based on user needs or market failure? Do exceptions require financial compensation? Can exceptions be contracted out by licence agreements?This report (i) reviews economic theory of contracts, value chains and transaction costs, (ii) identifies a comprehensive range of regulatory options relating to creator and user contracts, using an international comparative approach, (iii) surveys the empirical evidence on the effects of regulatory intervention, and (iv) where no evidence is available, extrapolates predicted effects from theory.

Smart Flexibility Clauses in International Investment Treaties and Sustainable Development

A major challenge for investment treaty designers and adjudicators is to separate opportunistic behavior by host states that should be sanctioned under international law from bona fide public policy measures that should not. This article suggests that international investment agreements (iias) need to be both ‘smarter’ and more ‘flexible’ to better make that distinction. It draws on economic contract theory as a basic framework, and political economy theory for fine-tuning.

Economic contract theory tests models of mutualism

Although mutualisms are common in all ecological communities and have played key roles in the diversification of life, our current understanding of the evolution of cooperation applies mostly to social behavior within a species. A central question is whether mutualisms persist because hosts have evolved costly punishment of cheaters. Here, we use the economic theory of employment contracts to formulate and distinguish between two mechanisms that have been proposed to prevent cheating in host–symbiont mutualisms, partner fidelity feedback (PFF) and host sanctions (HS). Under PFF, positive feedback between host fitness and symbiont fitness is sufficient to prevent cheating; in contrast, HS posits the necessity of costly punishment to maintain mutualism. A coevolutionary model of mutualism finds that HS are unlikely to evolve de novo,and published data on legume–rhizobia and yucca–moth mutualisms are consistent with PFF and not with HS. Thus, in systems considered to be textbook cases of HS, we find poor support for the theory that hosts have evolved to punish cheating symbionts; instead, we show that even horizontally transmitted mutualisms can be stabilized via PFF. PFF theory may place previously underappreciated constraints on the evolution of mutualism and explain why punishment is far from ubiquitous in nature.

International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis

This article analyzes international investment protection law by using tools of economic contract theory. Contract theory has been applied to international trade law, but investment law has not yet been analyzed under this methodology. International Investment Agreements may be interpreted as a mechanism for overcoming commitment problems between investor and host state in order to generate mutual benefits. States trade credibility for sovereignty as international investment law restricts the regulatory conduct of states to an unusual extent, subject to control through compulsory international adjudication. A well-known problem in contract theory is how to deal with uncertainty. Changing conditions are a prevalent characteristic in investment law. Contract theory finds that too strict and inflexible contracts may impair the joint surplus of the contracting parties. Thus, a trade-off arises between ex ante commitment on the one hand and flexibility ex post in order to uphold the efficiency of the contract on the other. Those problems become virulent in unforeseen crises, such as financial or economic ones. This article analyzes commitment and flexibility mechanisms in international investment protection law and proposes to use similar mechanisms as in WTO law to design more optimal contracts.

An economic analysis of payment for health care services: The United States and Switzerland compared

This article seeks to assess whether physician payment reforms in the United States and Switzerland were likely to attain their objectives. We first introduce basic contract theory, with the organizing principle being the degree of information asymmetry between the patient and the health care provider. Depending on the degree of information asymmetry, different forms of payment induce "appropriate" behavior. These theoretical results are then pitted against the RBRVS of the United States to find that a number of its aspects are not optimal. We then turn to Switzerland's Tarmed and find that it fails to conform with the prescriptions of economic contract theory as well. The article closes with a review of possible reforms that could do away with uniform fee schedules to improve the performance of the health care system.

Between Commitment and Flexibility: The Fragile Stability of the International Investment Protection Regime

This article analyzes international investment protection law by using tools of economic contract theory. Contract theory has been applied to international trade law, but investment law has not yet been analyzed under this methodology. Bilateral Investment Treaties or International Investment Agreements may be interpreted as a mechanism for overcoming commitment problems between investor and host state in order to generate mutual benefits. States thereby trade credibility for sovereignty as international investment law restricts the regulatory conduct of states to an unusual extent, subject to control through compulsory international adjudication. A well-known problem in contract theory is how to deal with uncertainty. Parties cannot easily design contracts that maximize jointly beneficial investments and at the same time respond appropriately to changing conditions ex post. Changing conditions are a prevalent characteristic in investment law covering long term investments. Contract theory finds that too strict and inflexible contracts may impair the joint surplus of the contracting parties. Thus, a trade-off arises between ex ante strong commitment devices on the one hand and flexibility ex post in order to uphold the efficiency of the contract on the other hand. The article analyzes commitment and flexibility mechanism in international investment protection law and proposes to use similar mechanisms to the WTO law in order to design more optimal contracts (that is investment treaties).

Nonprofit versus corporate governance: An economic approach

AbstractThis article proposes a new theoretical concept of nonprofit governance using transaction cost economics and the economic theory of contracts. After a short review of economic approaches to corporate governance, I clarify the specific nature of the governance problem in nonprofit organizations. Based on this analysis, I derive criteria for selecting an organization's relevant stakeholders. If stakeholders provide valuable specific resources without the protection of a comprehensive contract that details exactly how the organization is to use these resources, then such stakeholders seek decision and control rights in order to direct the use of the resources they have provided. I argue that the core problem of governance is how to enhance valuable specific contributions of the relevant stakeholders while keeping the costs of bargaining between stakeholders and the costs of collective decision making low. The theory developed is then applied in a discussion of practically relevant governance mechanisms, and the concept of governance is used to contribute to the discussion on the strengths and weaknesses of the nonprofit character of organizations from a governance perspective.

Perils of Success? The Case of International Investment Protection

Foreign direct investment forms an ever more important part of globalised market structures, and international investment law has become one of the most successful and judicialised areas of public international law. In order to attract investment, States commit themselves to treaties that restrict their regulatory sovereignty in ways that are sometimes unpredictable, owing to vague terms in the treaties and the broad use by investment tribunals of their delegated discretion.This article uses economic contract theory in order to understand whether the commitment problem ex ante and the flexibility problem ex post are optimally solved. It is hypothesised that the participation constraints on States may be overlooked by investment tribunals, thereby leading to an undesired weakening of protection of investors in the long run due to reactions by States. First, States may opt out of the system, for example by exiting treaties or by non-compliance. Second, they may also water down the substantive or procedural protections. Third, whereas investment treaties were seen in the beginning as a restraint on developing countries, investment increasingly flows to equally highly regulated developed countries. As legal protection is reciprocal but the capital flows used to be unilateral, developed countries might also react to their restriction of sovereignty, as the United States has already done, for example. These perils could lead to a backlash in international investment protection of which indications are already visible.

On the Drafting of Confidentiality Agreements

This is not a theoretical paper but an application of existing law and economic contract theory to the issue of how to draft a specific kind of contract. It is addressed to practitioners and is intended for practical use. It will be part of a Wiki (as in Wikipedia) for contract drafting, which IACCM (International Association for Contract and Commercial Management) has initiated. The main theoretical aspect of the article concerns the application of the value maximization principle (the Coase theorem) to the drafting of confidentiality agreements. While the article is not theoretical, its prescriptions are open to theoretical dispute; this may especially be the case for the section on the size of damages.

Knut Wicksell: Zum Geburtstag des Begründers einer kritischen Vertragstheorie

Zusammenfassung Im vorliegenden Beitrag wird Knut Wicksell anläßlich seines 150. Geburtstages gewürdigt. Zunächst wird Wicksells Leben und Werk kurz vorgestellt, bevor auf seine zentralen Leistungen für die Theorie der Besteuerung eingegangen wird. Das von Wicksell entwickelte Prinzip der Einstimmigkeit ist Grundlage einer ökonomischen Vertragstheorie, mit der dem Bürger Möglichkeiten von Kooperationsvorteilen aufgrund der Bereitstellung bestimmter öffentlicher Leistungen aufgezeigt werden können. Wicksell wird in dem Beitrag als Begründer einer kritischen Vertragstheorie präsentiert. Eine kritische Vertragstheorie muß drei Elemente beinhalten: Als erstes muß ihre Argumentation streng individualistisch sein. Zweitens sollte nach einem gerechten Verfahren und nicht nach einem „gerechten“ Ergebnis bei der Bestimmung öffentlicher Aufgaben gesucht werden. Und drittens sollte eine kritische Vertragstheorie die Verteilungsfrage nicht aus dem Blick verlieren. Alle drei Elemente wurzeln im Wicksellschen Werk. Obwohl Wicksell der Lösung der Verteilungsfrage, mit dem von mir als „produktive Regeln der Umverteilung“ bezeichneten Konzept, sehr nahestand, war er selbst bezüglich ihrer prinzipiellen Lösung eher pessimistisch. Bei kritischer Betrachtung fällt auf, daß Wicksell in seinem Modell die Entscheidungskosten nicht berücksichtigte. Daher wird am Schluß des Beitrages dargelegt, wie ihre Berücksichtigung Möglichkeiten für weitere Forschung bietet.

Les paiements directs aux agriculteurs dans l'Union européenne : politique communautaire ou politiques nationales?

Direct payments to the agricultural sector in the European Union : national or european policies? Some EU common policies could be more efficient if they were managed in a decentralised way by national agents (member states or regions) who are more able to fine-tune these policies to local conditions. This might, however, lead to a renationalisation of the CAP, generating competition distortions between countries. Delegation of EU policies to national agents is seen as a trade-off between information (efficiency of local management) and the risk of "conclusion" (i.e. a converging interests between States and producers for benefiting from EU funding). Recent contributions of economic theory of contracts and information are illustrated with the case of EU agri-environmental payments.

Further Toward a Theory of Agricultural Insurance

AbstractThe economic theory of contracts is applied to agricultural insurance to show that, given full information, Pareto‐optimal insurance contracts are actuarially fair, provide full coverage, and differ for each individual. The information problems of moral hazard and adverse selection prevent Pareto optimality from being attained. Several “second‐best” solutions to these problems are applied to agricultural insurance. It is shown that information collection and the application of contract design principles are “second‐best” solutions which may achieve the benefits of insurance at less cost than the current practice of public subsidies.

The Marketing Channel as an Equilibrium Set of Contracts

Nash bargaining theory and recent developments in economic contract theory are employed in the analysis of the marketing channels. Individual dyadic contracts involving payment schedules between members of a simple 3 level channel are investigated with particular reference to monitoring problems and intrachannel power relations. The interrelations between individual contracts are examined and the equilibrium set of contracts constituting the channel derived. The performance of the channel in terms of risk sharing, allocative efficiency and the distribution of gains is then evaluated. It is found that the risk aversion of channel members and the cost of monitoring and enforcement affect channel efficiency, and that under certain types of interdependencies and externalities, the nature of the power structure is crucial to channel efficiency.