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Contract Theory

In: Industrial Organization

Author

Listed:
  • Cintya Lanchimba

    (Escuela Politécnica Nacional, Departamento de Economía Cuantitativa)

Abstract

This chapter introduces contract theory as a framework to analyze relationships affected by asymmetric information and incentive conflicts. It starts with agency theory, focusing on the principal-agent problem, where diverging interests can reduce efficiency. Adverse selection models are developed, emphasizing hidden information and the role of signaling in improving outcomes. Moral hazard is studied in detail, highlighting how hidden actions affect compliance and monitoring. The second part applies these concepts to vertical restraints in distribution networks. It analyzes issues such as the distributor’s moral hazard, retailer risk aversion, and franchise arrangements. The literature on franchise networks is reviewed, showing how contract theory explains real-world organizational forms. By linking theoretical models with practical applications, the chapter demonstrates how contracts can mitigate inefficiencies and align incentives. It closes with a synthesis of key findings and suggested exercises, reinforcing student understanding of contractual dynamics in economics and business, and informs managerial practice.

Suggested Citation

  • Cintya Lanchimba, 2026. "Contract Theory," Springer Books, in: Industrial Organization, chapter 0, pages 91-124, Springer.
    • Handle: RePEc:spr:sprchp:978-3-032-10906-4_5
    DOI: 10.1007/978-3-032-10906-4_5
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