Friday, 10 June 2011

Grossman and Hart at 25

In a previous post I asked Is the theory of the firm big business and answered no for New Zealand. Well there may be little interest shown in it here but not so overseas. There is an upcoming conference on "Grossman and Hart at 25". This year marks the 25th anniversary of the publication of Grossman and Hart's seminal paper “The Costs and the Benefits of Ownership: A Theory of Vertical and Lateral Integration."

In the years that have followed, we have witnessed an explosion of literature on incomplete contracts. Just how large an explosion is shown by the areas cover by the conference: Incomplete Contracts and Boundaries of the Firm, Incomplete Contracts and Internal Organization of the Firm, Incomplete Contracts and Corporate Finance, the Foundations of Incomplete Contracts, Incomplete Contracts and Industrial Organization, Incomplete Contracts and International Trade, Incomplete Contracts, Public Ownership, and Cooperatives, Incomplete Contracts and Political Economy and New Directions of Incomplete Contracts and Experiments. We just have to hope someone publishes the papers from the conference.

A useful (and surprisingly readable) survey article on some of these areas can be found in the Spring 2011 issue (Vol. 25, No. 2) of the "Journal of Economic Perspectives": “Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?” by Philippe Aghion and Richard Holden. The introduction outlines the paper as:
In the first section of this paper, we spell out Grossman and Hart’s argument using a simple numerical example, then then we show how the incomplete contracts approach can be extended beyond the firms’ boundaries issue to analyze firms’ internal organization; firms’ financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. In the second section, we discuss several criticisms of the incomplete contracts/property rights methodology, especially what we call the “implementation criticism,” and then we briefly review some recent developments of the incomplete contracts approach.
How long before a Nobel gets given for incomplete contracts?

No comments: