Introduction: contracts … and institutions

Contracts as analytical tools, contracts as objects of analysis

Although many textbooks point out that new institutional economics (NIE) brought firms, institutions, and property rights to the forefront of the research agenda of economists it should be highlighted that it strongly contributed to turn contracts into essential analytical tools in economics and as a central object of investigation. Contracts are fundamental in NIE: Ronald Coase (1937) developed a contractual approach to the firm; Oliver Williamson (1975, 1985) developed a contractual approach to the governance of transactions. Their efforts – together with those of other scholars closer to the neoclassical approach who were seeking to renew the theory of prices – led to renew economics.

There are two ways of considering contracts in economics. Contracts may be considered, first, as analytical tools. The contractual approach applies, then, to almost any relationship: from transactions between firms to any relationship among entities. This way of relying on a very abstract notion of contract – which may be social, implicit, and so on – does not take into consideration, however, the conditions in which agreements are settled and enforced. Alternatively, contracts may be considered as actual means of coordination, organizing coordination among agents, thanks to a set of mutually agreed promises.

In this chapter we will concentrate on this last vision since we would like to highlight the contribution of NIE and sister approaches – especially applied law and economics – to the understanding of contractual problems.