Incomplete Contracts and Renegotiation

Hart, Oliver; Moore, John

doi:10.2307/1912698

Cited by 1,472 publications

(771 citation statements)

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“…In this sense the identification of creation theory may ultimately have implications for research on the theory of the firm (Alvarez and Barney, 2005). Currently popular theories of the firm-including transactions cost economics (Williamson, 1975(Williamson, , 1985 and incomplete contract theory (Hart and Moore, 1988) adopt the assumption that at the time a firm is created, parties to this exchange can either estimate the relative value of transaction specific investments they must make to complete an exchange (for transactions cost theory) or estimate who has the most to gain from that exchange (for incomplete contract theory). Of course, in the uncertainty conditions described in creation theory, it is unlikely that those contemplating the founding of an entrepreneurial firm will be able to know this information, especially early in the opportunity enactment process.…”

Section: Creation and The Theory Of The Firmmentioning

confidence: 99%

Discovery and creation: alternative theories of entrepreneurial action

Alvarez

Barney

2007

Strategic Entrepreneurship

1,570

498

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Do entrepreneurial opportunities exist, independent of the perceptions of entrepreneurs, just waiting to be discovered? Or, are these opportunities created by the actions of entrepreneurs? Two internally consistent theories of how entrepreneurial opportunities are formed-discovery theory and creation theory-are described. While it will always be possible to describe the formation of a particular opportunity as an example of a discovery or creation process, these two theories do have important implications for the effectiveness of a wide variety of entrepreneurial actions in different contexts. The implications of these theories for seven of these actions are described, along with a discussion of some of the broader theoretical implications of these two theories for the fields of entrepreneurship and strategic management Keywords: entrepreneurship theory; opportunity creation; opportunity discovery; uncertainty. ORGANIZAÇÕES EM CONTEXTOOrganizações em contexto, Ano 3, n. 6, dezembro 2007 124 RESUMOAs oportunidades empreendedoras existem independentemente das percepções dos empreendedores, esperando apenas para serem descobertas? Ou essas oportunidades são criadas pelas ações dos empreendedores? Duas teorias, internamente consistentes com as oportunidades empreendedoras, são: a da criação e a da descoberta -as quais serão descritas. Enquanto for sempre possível descrever a formação de uma oportunidade particular, como exemplo, de um processo da descoberta ou da criação de oportunidade, essas duas teorias terão implicações importantes para a eficácia de ampla variedade de ações empreendedoras em contextos diferentes. As implicações dessas teorias para sete dessas ações serão descritas, acompanhadas de discussão sobre algumas das implicações teóricas mais amplas para os campos do empreendimento e do gerenciamento estratégico. Palavras-chave: teoria do empreendimento; criação da oportunidade; descoberta da oportunidade; incerteza.

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Section: Creation and The Theory Of The Firmmentioning

confidence: 99%

Discovery and creation: alternative theories of entrepreneurial action

Alvarez

Barney

2007

Strategic Entrepreneurship

1,570

498

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“…A second approach going back to Hart and Moore (1988) allows for a long-term contract on trade, but the contract cannot be state-contingent and is therefore likely to be suboptimal after the realization of the state of the world in which case the parties have to renegotiate it.…”

Section: Asset Ownership Long-term Contracts and The Hold-up Problemmentioning

confidence: 99%

Loss Aversion and Inefficient Renegotiation

Herweg

Schmidt

2014

The Review of Economic Studies

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate. Terms of use: Documents in EconStor mayJEL classification numbers: C78; D03; D86.

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“…They define ownership as the assumption of these rights, which determine the outcome under the uncovered contingencies of an incomplete contract. Hart and Moore (1988) sharpen Williamson's argument by pointing out that contracts may be incomplete because certain variables are nonverifiable by a third party such as an arbitrator or a court, even though they are observable by the parties entering into a relationship. Being "observable but non-verifiable" means that the parties cannot enter into a contract based on the outcome of these variables.…”

Section: It and Organizational Governancementioning

confidence: 99%

Ownership and Investment in Electronic Networks

Bakos

Nault

1997

Information Systems Research

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We employ the theory of incomplete contracts to examine the relationship between ownership and investment in electronic networks such as the Internet and interorganizational information systems. Electronic networks represent an institutional structure that has resulted from the introduction of information technology in industrial and consumer markets. Ownership of electronic networks is important because it affects the level of network-specific investments, which in turn determine the profitability and in some cases the viability of these networks. In our analysis we define an electronic network as a set of participants and a portfolio of assets. The salient concept in this perspective is the degree to which network participants are indispensable in making network assets productive. We derive three main results: First, if one or more assets are essential to all network participants, then all the assets should be owned together. Second, participants that are indispensable to an asset essential to all participants should own all network assets. Third and most important, in the absence of an indispensable participant, and as long as the cooperation of at least two participants is necessary to create value, sole ownership is never the best form of ownership for an electronic network. This latter result implies that as the leading network participants become more dispensable, we should see an evolution towards forms of joint ownership.

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Incomplete Contracts and Renegotiation

Cited by 1,472 publications

References 15 publications

Discovery and creation: alternative theories of entrepreneurial action

Discovery and creation: alternative theories of entrepreneurial action

Loss Aversion and Inefficient Renegotiation

Ownership and Investment in Electronic Networks

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