Introduction

Extract

The five survey papers in this special issue are outgrowths of presentations made at a conference in the honor of the 25th anniversary of the publication in 1986 of the by-now classic paper “A Theory of Vertical and Lateral Integration” by Grossman and Hart¹ (hereafter GH). The conference brought together scholars who, in different fields, apply GH’s key insights. The collection of these essays represent a unique up-to-date analysis of the broad set of applications of the incomplete contract framework.

The GH framework was developed to answer a somewhat naïve, but fundamental question, raised by Ronald Coase in 1932: if the market is an efficient method of resource allocation, then why do so many transactions take place within firms?² There was no model at the time to address this question. Coase just relied on informal arguments for the existence of firms, in particular emphasizing haggling problems in decentralized market transactions, which he thought authority within firms could partly overcome. In other words, firms exist because there are costs to using the price mechanism: prices must become known, bargains must be made, contracts must be written.