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Theoretical isolation in contract theory: suppressing margins and entrepreneurship

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  • Kirsten Foss
  • Nicolai Foss

Abstract

We discuss contract theory from a combined Austrian/new institutional view. In the latter view, the world is seen as shot through with ignorance and transaction costs, but, as a tendency, entrepreneurial activity responds to the problems caused by these. All modelling must critically reflect this. This ontological commitment is contrasted to various isolations characteristic of contract theory, specifically the modelling strategy of introducing often ad hoc and unexplained constraints that suppress margins and possibilities of entrepreneurial actions that would be open to real-world decision-makers. We illustrate this by means of, for example, the treatment of asymmetric information under complete contracting and the notion of control rights under incomplete contracting.

Suggested Citation

  • Kirsten Foss & Nicolai Foss, 2001. "Theoretical isolation in contract theory: suppressing margins and entrepreneurship," Journal of Economic Methodology, Taylor & Francis Journals, vol. 7(3), pages 313-339.
  • Handle: RePEc:taf:jecmet:v:7:y:2001:i:3:p:313-339
    DOI: 10.1080/135017800453724
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    References listed on IDEAS

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    1. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    1. repec:eee:rujoec:v:2:y:2016:i:1:p:86-110 is not listed on IDEAS

    More about this item

    Keywords

    Contract Theory; New Institutional Economics; Austrian Economics; Entrepreneurship;

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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