One prominent application of it is the design of optimal schemes of managerial compensation. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as law and economics. For legal definitions and contract law, see Contract.įrom a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.įrom an economic perspective, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. This article is about the economic analysis of contracts.
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