Thursday, October 13, 2016

The Contract Theory

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Having majored in Economics in college, I took keen interest in the subject for which this year's Nobel Prize in Economics was awarded.

The Contract Theory, while highlighting the basic essentials of commercial transactions in our economic system, does not really fit well within the realm of Economic Sciences. It actually pertains to Law, for which there is no Nobel Prize.

Secondly, while contracts spell out the broad contours of a commercial relationship, yet the key factor governing lasting commercial relationships now, is relationships, which need to go beyond the 'ifs' and 'buts' as spelled out in contracts.

Thirdly, one of the key assumptions of Economic Theory is 'Rationality', that is, the key participants in an economic system, be it a consumer, or a producer/firm, etc try to maximize their utility (satisfaction), or profit etc. Now, while negotiating contracts, the entities in question may not be able to act rationally, but may have to compromise over a 'satisfying' outcome, as elaborated in the particular contract, due to factors such as hidden limitations of the entities concerned.

My objective here is just to highlight some other aspects of Contracts, and certainly not to challenge the decision of the learned jury, which decided the coveted Prize.

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