Transaction costs economics; Contract theory
9 important questions on Transaction costs economics; Contract theory
What are the four levels in the transaction costs theory?
- Embeddedness: this is the level of social embeddedness, norms traditions are located here. This level is taken as given. They are operating since a long time. Very long time for changing, f.e. Traditions, norms, religions.
- institutional environment: formal rules of the game. Property rights, bureaucratic. Different levels of government. In this level the roots of the game are created. You can see that the frequency in which the institutional development is much less, they change in a certain range of time.
- Governance: institutions of government. Contracts. Listening and obeing to the former rules.
- Resource allocation.
What are the two contract theories?
- Agency theory; tries to understand how incorporate the right incentive into an contract. So we can prevent an opportunistic behaviour.
- Implicit contract theory; informal contract,. Voluntary agreements that last for a long time between parties on the future exchange of goods and services. Trust is very important as well. Self-enforcing, still ways to reach the agreement.
What are the four main elements of the contract?
- Identify contracting parties
- Specify required actions and conditions
- Specify payment
- Specify how 'disputes' will be resolved, or how 'contract breach' will be penalised.
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What can you say about the 'completeness' of the contract?
- In which contracts do you observe incompleteness? Either the payment conditions are missing, or there is no indication of how to form disputes.
- Why are contract incomplete? Not speficy what needs to be done in every contingency.
What is contract incompleteness?
- The use of implicit / self-enforcing / relational / informal contracts.
- These are contracts that cannot be enforces (by third parties / the law) and therefore have to be self-enforcing.
What are the four self-enforcing mechanisms in the implicit contract theory?
- Reputation
- Tit for tat
- Third party arbitrators
- Mutual commitment
What is tit for tat (- repeated games)?
- Actors in a transaction decide on their strategy based on the behaviour of the other actor in the previous period. Cooperation leads to cooperation, non-cooperation is followed by non-cooperation. Especially in relationships with high mutual dependence, the tit for tat strategy leads to self-enforcement.
What is the third party arbitrator?
What are the five characteristics of mutual commitment?
- Increase mutual dependence
- strong credible commitments
- use of ''hostages''.Hostages = down-payment that is forfeietd in case not all obligations are met (deposit for renting an apartment)
- Examples: case-study credible commitments in agri-food.
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