Economics of Contracts

This course will combine contract theory, a field of economics for which several Nobel prizes have been awarded, with a study of the practice of business transactions. Our discussion will explore how well economic theory illuminates actual contracting practices and how the practice of contract design deviates from theory. Our overarching goal will be to develop an understanding of business transactions that goes beyond the drafting of contract language to conceptual and structural features of agreements. We will discuss design topics such as how contracts respond to incomplete information, the "make or buy" choice (whether to carry out a project within a firm or contract with an external party), the role of judicial enforcement in relational contracts, the use of vague and/or precise language in agreements, obstacles and process of innovation in contracting, and the role and effect of bargaining power. This course differs from the Deals course in that it covers a different set of topics and is less applied, and this course will be conducted in a seminar fashion. Elements used in grading: Class participation, Written Assignments.