EC516 Contracts and Organisations for Research Students: Lecture 1 Leonardo Felli LSE, D6 19 February 2009
Course Outline EC516 Contracts and Organisations The Law and Economics of Contracts for Research Students: Lecture 1 Leonardo Felli Lecture 1: Contracts and Enforcement: Complete Introduction Contracts. Coase Theorem and its failures. Outline Admin References Lecture 2: Transaction Costs, Why parties go to Court? The Contract. The Contract. Lecture 3: The role of Courts: insurance, filling the gaps, Coase disclosure. Theorem Asymmetric info Lecture 4: Legal Systems: efficiency and tradeoffs. Revelation Principle Lecture 5: Enforcement, Power, Crime and Punishment. Bilateral Trade
Admin EC516 Contracts and Organisations for Research My coordinates: S.478, x7525, lfelli@econ.lse.ac.uk Students: Lecture 1 Leonardo Felli PA: Gill Wedlake, S.379, x6889, g.m.wedlake@lse.ac.uk Introduction Outline Admin Office Hours: References The Contract. Thursday 2:00-4:00 p.m. The Contract. or by appointment (e-mail lfelli@econ.lse.ac.uk). Coase Theorem Asymmetric Course Material: available at: info http://econ.lse.ac.uk/staff/lfelli/teaching Revelation Principle Bilateral Trade
References: Contract Theory EC516 Contracts and Organisations for Research Students: Oliver Hart, Firms Contracts and Financial Structure , Lecture 1 Oxford: Oxford University Press, 1995. Leonardo Felli Introduction Outline Admin Jean-Jacques Laffont and David Martimort, The Theory of References Inncentives: The Principal-Agent Model , Princeton and The Contract. The Contract. Oxford: Princeton University Press, 2002. Coase Theorem Asymmetric info Patrick Bolton and Mathias Dewatripont, Contract Revelation Theory , Cambridge: M.I.T. Press, 2004. Principle Bilateral Trade
References: Contract Law EC516 Contracts and John D. Calamari and Joseph M. Perillo, Contracts , St. Organisations for Research Paul: West Publishing Co., 1987. Students: Lecture 1 Stephen A. Smith and P.S. Atiyah, Atiyah’s Introduction Leonardo Felli to the Law of Contract , Oxford: Oxford University Press, Introduction Clarendon Law Series, 2006. Outline Admin References P.S. Atiyah, The Rise and Fall of the Freedom of The Contract. Contract , Oxford: Clarendon Press, 1979. The Contract. Coase Richard Craswell and Alan Schwartz, Foundations of Theorem Contract Law , New York: Foundation Press, 1994. Asymmetric info Roy Kreitner, Calculating Promises: The Emergence of Revelation Principle Modern American Contract Doctrine , Stanford: Stanford Bilateral Trade University Press, 2007.
The Contract EC516 Contracts and Organisations for Research The first natural question that needs to be answered is: Students: Lecture 1 Leonardo Felli What is a contract? Introduction Outline Admin References Definition The Contract. A contract is the ruling of an economic transaction: the The Contract. description of the performance that the contracting parties Coase Theorem agree to complete at a (possibly future) date. Asymmetric info Revelation Principle Bilateral Trade
EC516 Contracts and Organisations Example: a contract for the purchase of a specific item, for Research Students: say a meal. It specifies: Lecture 1 Leonardo Felli the restaurant’s performance (number of courses, quality Introduction Outline of food, cooking details, etc. . . ), Admin References The Contract. the customer’s performance (payment in full upon The Contract. completion). Coase Theorem Asymmetric Contracts involve not only the contracting parties, but also info Revelation outsiders (enforcing authority: the court). Principle Bilateral Trade
EC516 Contracts and Organisations We distinguish between implicit and explicit contracts. for Research Students: Lecture 1 A contract is implicit or self-enforcing whenever the Leonardo Felli environment in which the contracting parties operate Introduction corresponds to the extensive form of a game whose Outline Admin (unique) subgame perfect Nash equilibrium (PBE) exactly References The Contract. corresponds to the outcome the parties would like to The Contract. implement. Coase Theorem If you believe in SPE or PBE then there is no need for Asymmetric info explicit communication. The two rational individuals will Revelation behave in the way required. Principle Bilateral Trade
EC516 Contracts and Organisations If the outcome the parties would like to implement is not for Research Students: the subgame perfect Nash equilibrium of the environment Lecture 1 in which they operate the parties might want to modify Leonardo Felli the environment. Introduction Outline Admin This is accomplished through and explicit contract. References The Contract. The Contract. An explicit contract is a commitment device requiring: Coase Theorem an explicit agreement between the parties, Asymmetric info Revelation the intervention of a third party: the court . Principle Bilateral Trade
EC516 Contracts and The role of the court is to force the parties to behave in a Organisations for Research way that differs from the one that would arise in the Students: Lecture 1 absence of any agreement. Leonardo Felli An explicit contract therefore specifies a new extensive Introduction Outline form corresponding to a new game for the parties. Admin References The Contract. The usual way for the court to guarantee that the parties The Contract. operate in this new environment is by modifying the Coase parties’ payoffs , when necessary. Theorem Asymmetric info By agreeing to bring in a court in the game the parties Revelation commit to play a game that differs from the initial one Principle they were in. Bilateral Trade
EC516 Contracts and To see how the presence of a court may work consider the Organisations for Research following example: (Kreps, 1984) Students: Lecture 1 Leonardo Felli A buyer B and a seller S wish to trade an indivisible item Introduction at date 1. Outline Admin References The buyer’s valuation: v , The Contract. The Contract. The seller’s delivery cost: c . Coase Theorem Asymmetric Let info v > c Revelation Principle In other words, trade is socially efficient . Bilateral Trade
EC516 Contracts and Let p be a reasonable price level (we abstract for the Organisations for Research moment from bargaining) such that: Students: Lecture 1 Leonardo Felli v > p > c . Introduction Outline Admin References The Contract. B ’s and S ’s situation may be described by the following The Contract. normal form: Coase Theorem deliver not deliver Asymmetric info pay p v − p , p − c − p , p Revelation not pay p v , − c 0 , 0 Principle Bilateral Trade
EC516 Contracts and Organisations for Research The unique Nash equilibrium (dominant solvable) is: Students: Lecture 1 Leonardo Felli ( B does not pay , S does not deliver) . Introduction Outline Admin References This is clearly an inefficient outcome: no trade . The Contract. The Contract. Coase Theorem The situation does not change if any of the following two Asymmetric extensive forms are played. info Revelation Principle Bilateral Trade
The unique SPE of the following game is: EC516 Contracts and Organisations { B does not pay , S does not deliver at both nodes } . for Research Students: Lecture 1 B Leonardo Felli ❜ � ❅ � ❅ pay p Introduction not pay p � ❅ Outline Admin � ❅ References � ❅ S S � ❅ The Contract. q q ☞ ▲ ☞ ▲ The Contract. ☞ ▲ ☞ ▲ Coase ☞ ▲ ☞ ▲ Theorem not not deliver deliver ☞ ▲ ☞ ▲ Asymmetric deliver deliver ☞ ▲ ☞ ▲ info ☞ ▲ ☞ ▲ Revelation ☞ ▲ ☞ ▲ ☞ ▲ ☞ ▲ Principle q q q q Bilateral Trade ( v − p , p − c ) ( − p , p ) ( v , − c ) (0 , 0)
The unique SPE of the following game is: EC516 Contracts and Organisations { S does not deliver , B does not pay at both nodes , } . for Research Students: Lecture 1 S Leonardo Felli ❜ � ❅ � ❅ Introduction deliver not deliver � ❅ Outline Admin � ❅ References � ❅ B B � ❅ The Contract. q q ☞ ▲ ☞ ▲ The Contract. ☞ ▲ ☞ ▲ Coase ☞ ▲ ☞ ▲ pay p pay p Theorem not not ☞ ▲ ☞ ▲ Asymmetric pay p pay p ☞ ▲ ☞ ▲ info ☞ ▲ ☞ ▲ Revelation ☞ ▲ ☞ ▲ ☞ ▲ ☞ ▲ Principle q q q q Bilateral Trade ( p − c , v − p ) ( − c , v ) ( p , − p ) (0 , 0)
EC516 Contracts and Solution: to this inefficiency is an explicit contract Organisations for Research enforced by a court. Students: Lecture 1 Leonardo Felli It specifies: Introduction Outline the payment p that B is supposed to make contingent on Admin References S delivering the item, The Contract. The Contract. the punishment F B > p (implicit in the legal system) imposed by the court on B in the event that S delivers and Coase Theorem B does not pay, Asymmetric info the punishment F S > c (implicit in the legal system) Revelation imposed by the court on S in the event that B pays but S Principle does not deliver. Bilateral Trade
Recommend
More recommend
