- Philippe Aghion and Richard Holden on Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years? (pdf)
Cool and readable paper discussing the incomplete contracts approach to the theory of the firm. Sanford Grossman and Oliver Hart used the theory of incomplete contracts to develop answers to the question "What is a firm, and what determines its boundaries?" in their path-breaking paper on "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration". Perhaps the central issue is that economic actors are only boundedly rational and cannot anticipate all possible contingencies. It might well be that certain states of nature or actions cannot be verified by third parties after they arise, like certain qualities of a good to be traded in the future, and thus cannot be written into an enforceable contract. When contracts are incomplete, and consequently not all uses of an asset can be specified in advance, any contract negotiated in advance must leave some discretion over the use of the assets; and the "owner" of the firm is the party to whom the residual rights of control have been allocated at the contracting stage. The optimal allocation of property rights—or governance structure—is one that minimizes efficiency losses. This produces a theory of ownership and vertical integration as well as a theory of the firm. First we spell out Grossman and Hart's argument using a simple numerical example. Then we show how the incomplete contracts approach can be used to analyze the firms' internal organization; the firms' financial decisions; the costs and benefits from privatization; and the organization of international trade between inter- and intrafirm trade. We discuss several criticisms of the incomplete contracts/property rights methodology and review recent developments of the incomplete contracts approach.
- Seamus Hogan on Electricity "Overcharging" Again
Is there over charging in New Zealand's electricity markets or not?
- Roger Kerr on Budget-2011: the vision thing
As background to today’s budget, this is an interesting analysis of the New Zealand economy by London-based investment advisory firm Independent Strategy.
- Eric Crampton on Budget 2011
Assorted first impressions on the budget
- Mario Rizzo asks Is Economics a Public Good? How Would We Know?
What is the economic justification for using tax money to subsidize the production of economic research? The standard answer is that academic economists produce a public good. In other words they produce knowledge for which they do not charge and for which it is not feasible to exclude non-payers.
- Peter Boettke also asks Is Economics a Public Good?
Just because a "good" might have publicness characteristics does not mean it is the responsibility of the public sector to finance it let alone produce it.
- Ed Dolan asks Will Shifting Political Winds Finally Kill Ethanol Subsidies?
We can only hope so.
- John Taylor argues that Linking the Debt Limit Hike To Spending Cuts Is Good Economics
Recent arguments in the U.S. about debt and spending do not take account of important economic advantages of linking the debt limit to spending reductions. Such a link is good economics in theory and in practice. It is essential to a credible return to sound fiscal policy and an end to the ongoing debt explosion.