The theory of contracts

The past decade has witnessed a growing interest in contract theories of various kinds. This development is partly a reaction to our rather thorough understanding of the standard theory of perfect competition under complete markets, but more importantly to the resulting realization that this paradigm is insufficient to accommodate a number of important economic phenomena. Studying in more detail the process of contracting - particularly its hazards and imperfections - is a natural way to enrich and amend the idealized competitive model in an attempt to fit the evidence better. At present it is the major alternative to models of imperfect competition; we will comment on its comparative advantage below.