……Motivation: contracts, information and incentives M/R Chapter 5

The aim: Look at the framework for contracting identify a wider spectrum of causes of imperfect contracting than opportunism and ‘Wealth Effects’. types of contract available how the type of contract matches the circumstances under which a transaction is carried out

Contracting in practice: In the short and medium run the behaviour of firms can be explained in terms of relatively simple decision rules and standard operating procedures (routines in Evolutionary Economics ). “Routines” bring the Coase Theorem into difficulties (efficiency alone determines organizational choices) “Routines” impede efficient choices from being considered in the contracts

Framework for contracting: Interface between investors and companies Auditors Boards Analysts Brokers Investment bankers Scientific Advisers’ Board

Framework for contracting: Transaction Cost Approch to organisation The institutional framework of contracting is taken for given The choice of contract depends on the characteristics of a transaction asset specificity measured as the percentage of investment value that is lost when the asset is used outside the specific setting or relationship. cospecialized assets, i.e. they are most productive when used together and lose much of their value if used separately to produce independent products or services.

Further circumstances to be included in the framework: ‘Hold-up problem’: One who makes an asset specific investment can be harmed by a threat by other parties to terminate a relationship. This threat permits these parties to obtain better terms than were initially agreed. ‘Implicit contract’ Shared understandings that are not legally enforceable, but the parties consider it to be binding on one another’s conduct. The “end game problem” The value of reputation and the motivation for investing in trust relationships depends on the time horizon over which similar transaction are expected to occur.

‘Corporate culture’ serves two purposes: 1.Conditions and synchronizes the employees’ behaviour in accordance with desirable reputation objectives 2.Sends a message to its transacting partners, which informs about expectations about a trading relation