Oliver Hart

The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1s control increases the productivity of its management more than the loss of control decreases the productivity of firm 2s management.

Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation

A spray gun especially adapted for dispensing foam type plastics or other coating materials which is characterized by two feed lines for the coating materials which are encased in return lines with valves which are selectively positioned to control the flow of the material so as to provide, selectively, for spray operation or for continuous return flow to the supply source without passage through the discharge control valves of the gun. The discharge control valve assemblies are readily removable as complete units for cleaning and repair. A solvent flush valve is arranged relative to the discharge control valves to enable the valves, the mixing chamber and passageways in the head to be flushed out with solvent while the valves are in place and while the coating material is recirculated through the supply lines.

An Analysis of the Principal-Agent Problem

Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent’s utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent’s preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.

Incomplete Contracts and Renegotiation

When drawing up a contract, it is often impracticable to specify all the relevant contingencies, and so contracts are typically incomplete. This paper considers the extent to which these gaps migh t be filled by building into the contract a mechanism for revising th e terms of trade. One conclusion is that because the par-ties can res cind the original contract and ne-gotiate a new one, severe limitatio ns are placed on the form the revisions can take. The authors charact erize the optimal revision mechanism both when the contract is used t o encourage relationship-specific investments and when it is used for risk sharing. Copyright 1988 by The Econometric Society.

The theory of contracts

This paper was presented at the World Congress of the Econometric Society, Cambridge, Massachusetts, 1985

Default and Renegotiation: A Dynamic Model of Debt

We analyze the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract -- specifically, the trade-off between the size of the loan and the repayment -- under the assumption that some debt contract is optimal. In the second part we consider a more general class of (non-debt) contracts, and derive sufficient conditions for debt to be optimal among these.

VERTICAL INTEGRATION AND MARKET FORECLOSURE

Supported by the MIT Energy Lab, the Guggenheim Foundation, the Olin Foundation, the National Science Foundation, the Taussig Visiting Professorship at Harvard and the Marvin Bower Fellowship at the Harvard Business School.

On the optimality of equilibrium when the market structure is incomplete

In the Arrow-Debreu theory of general equilibrium, it is assumed that markets exist for current goods and also for goods to be delivered at future dates and in uncertain events. Under this assumption, and if economic agents face no transaction costs, all economic decisions will be made at one time and markets will open only once. . In the real world, however, we observe that few markets for contingent futures goods exist at any one time, and that markets reopen many times. In recent years, several authors have constructed general equilibrium models that reflect this incomplete and sequential aspect of real world trading. Two main approaches have been taken: the temporary equilibrium approach and the rational expectations approach. The temporary equilibrium approach assumes that economic agents have given expectations of future prices and investigates whether there exist prices which clear current markets (for a discussion of this approach, see Arrow and Hahn [2] and Grandmont [5]). The rational expectations approach, on the other hand, regards expectations as variables and investigates whether there exists a set of current prices and expected prices such that all markets, both current and future, are cleared (for a discussion of this approach, see Radner [ 11 I). Most of the work that has been done on incomplete and sequential markets has been concerned with establishing the existence of equilibrium. The subject of the optimality of equilibrium has received considerably less attention. Now it is clear that a temporary equilibrium will not generally enjoy any optimality properties since the actions of economic agents are

Incomplete Contracts and Public Ownership: Remarks, and an Application to Public‐Private Partnerships*

The question of what should determine the boundaries between public and private firms in an advanced capitalist economy is a highly topical one. In this paper I discuss some recent theoretical thinking on this issue. I divide the paper into two parts. First, I make some general remarks about the relationship between the theoretical literature on privatisation and incomplete contracting theories of the firm. Second, I use some of the ideas from this literature to develop a very preliminary model of public-private partnerships. Copyright Royal Economic Society 2003

A Model of Imperfect Competition with Keynesian Features

The recent literature on “the reappraisal of Keynes†has viewed Keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities. One problem with this approach is that it lacks a theory of price determinationâ€â€in particular, of why prices are fixed. In the present paper, we show that a number of Keynesian features arise in a model in which prices are fully flexible, but where agents have some monopoly power. One advantage of this approach is that it provides a theory of the determination of both prices and quantities.