The Costs and Benefits of a Separation of Powers - An Incomplete Contracts Approach

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” (Journal of Political Economy, 1986, vol. 94, no. 4). 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.

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Consent, Contestability, and Unions

Business Ethics Quarterly ◽

10.1017/beq.2018.25 ◽

2018 ◽

Vol 29 (2) ◽

pp. 189-211 ◽

Cited By ~ 2

Author(s):

Lars Lindblom

Keyword(s):

Separation Of Powers ◽

Incomplete Contracts ◽

Employment Contracts ◽

Starting Point ◽

Normative Justification ◽

Consent Theory

ABSTRACT:This article provides a normative justification for unions. It discusses three arguments. The argument from consent justifies unions in some circumstances, but if the employer prefers to not bargain with unions, it may provide very little justification. The argument from contestability takes as its starting point the fact that employment contracts are incomplete contracts, where authority takes the place of complete contractual terms. This theory of contracts implies that consent to authority has been given under ignorance, and, therefore, that authority cannot be justified by consent. Contestability is a mechanism that can handle this problem for consent theory. It demands transparency, channels for voice, and a forum where contestations can be evaluated. This idea can be implemented in firms in different ways, but the argument from the separation of powers implies that unions are uniquely suited to implement contestability, since they are organized outside of the employer’s domain of authority.

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Using the research on intergroup conflict in nonhuman animals to help inform patterns of human intergroup conflict

Behavioral and Brain Sciences ◽

10.1017/s0140525x19000827 ◽

2019 ◽

Vol 42 ◽

Author(s):

Amanda R. Ridley ◽

Melanie O. Mirville

Keyword(s):

Large Body ◽

Nonhuman Animal ◽

Intergroup Conflict ◽

Costs And Benefits ◽

Animal Groups ◽

Interesting Article ◽

Nonhuman Animals

Abstract There is a large body of research on conflict in nonhuman animal groups that measures the costs and benefits of intergroup conflict, and we suggest that much of this evidence is missing from De Dreu and Gross's interesting article. It is a shame this work has been missed, because it provides evidence for interesting ideas put forward in the article.

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