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Contracts and Induced Institutional Change

Author

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  • Bård Harstad
  • Torben Mideksa

Abstract

We study agents’ incentives to form horizontal coalitions before a principal offers vertical contracts. When a vertical contract generates negative externalities on other agents, the agents may collude in order to obtain better deals; when one contract benefits other agents, the agents may decentralize, instead. Contractually induced institutional changes always harm the principal and the negative effect can outweigh the direct effects of the contracts, making the contracts counterproductive. The model is tractable and sufficiently flexible to be relevant for applications such as regulation of pollution, payments for forest conservation, and mergers between firms in a supplier–franchisee relationship. (JEL D86, H23, H87, Q58).

Suggested Citation

  • Bård Harstad & Torben Mideksa, 2024. "Contracts and Induced Institutional Change," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 40(1), pages 1-33.
    • Handle: RePEc:oup:jleorg:v:40:y:2024:i:1:p:1-33.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewac003
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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