Product Description

This work uses recent developments in the theory of incomplete contracts to analyze a range of topics in organization theory and corporate finance. Beginning with a general model of the firm, Hart analyzes in greater depth the financial structure of firms, debt collecting and bankruptcy. Oliver Hart is a leading researcher in this area, and these Clarendon Lectures are an important contribution to contact theory. The work will be of interest to teachers, graduate students and advanced students of microeconomics, the theory of the firm, industrial organization, and finance.

Product Details

• Amazon Sales Rank: #591175 in Books
• Published on: 1995-12-07
• Original language: English
• Number of items: 1
• Binding: Paperback
• 240 pages

Review

"This book, which synthesizes most of Oliver Hart's work since 1980, provides a clear introduction to the modern theory of the firm, and ultimately a very compelling answer to...fundamental questions in the form of the increasingly accepted Property Rights Theory of the Firm."--Jeffrey Zwiebel, Economica
"I expect it to be essential reading for any economics or finance Ph. D. student interested in corporate finance. Thus, this volume should contribute to the development of the contracts approach to corporate finance....Firms, Contracts, and Financial Structure provides an excellent exposition of the incomplete contracts approach to the theory of the firm....[I]t is a fine survey of the author's contributions to the theory of firm boundaries and financial structure. As such, I commend it highly."--Milton Harris, Review of Financial Studies
"A very clear, unified treatment of the implications of incomplete contracting. A truly solid foundation for the theory of integration and financial structure."--Birger Wernerfelt, Sloan School, MIT
"I recommend this book to all who are interested in the theory of the firm and in Hart's current and recent contributions to this theory. There is much to applaud in the book."--Harold Demsetz, University of California, Los Angeles

About the Author

Oliver Hart is Professor of Economics at Harvard University.

Customer Reviews

A classic on the theory of the firm
Consider an economic relationship where relationship-specific investments are important and transaction costs make it impossible to write a comprehensive long-term contract to govern the terms of the relationship. Consider also the nonhuman assets that, in the post-investment stage, make up this relationship. Given that the initial contract has gaps, missing provisions, or ambiguities, situations will occur in which some aspects of the use of these assets are not specified. Take the position that the right to choose these missing aspects of usage resides with the 'owner' of the asset. That is, ownership of an asset goes together with the possession of residual rights of control over that asset; the owner has the right to use the asset in any way not inconsistent with a prior contract, custom, or any law. Finally, identify a firm with all the nonhuman assets that belong to it, assets that the firms's owners possess by virtue of being owners of the firm. Included in this category are machines, inventories, buildings or locations, cash, client lists, patents, copyrights, and the rights and obligations embodied on outstanding contract to the extent that these are also transferred with ownership. Human assets, however, are not included. Since human assets cannot be bought or sold, management and workers presumably own their own human capital.

We now have the basic ingredients of a theory of the firm. This theory has become known as the property rights approach to the theory of the firm. In a world of transaction costs and incomplete contracts, ex post residual rights of control will be important because, through their influence on asset usage, they will affect ex post bargaining power and the division of ex post surplus in a relationship. This division in turn will affect the incentives of actors to invest in that relationship. Hence, when contracts are incomplete, the boundaries of firms matter in that these boundaries determine who owns and controls which assets. In particular, a merger of two firms does not yield unambiguous benefits: to the extent that the (owner-)manager of the acquired firm loses control rights, his incentive to invest in the relationship will decrease. In addition, the shift in control may lower the investment incentives of workers in the acquired firm. In some cases these reductions in investment will be sufficiently great that non integration is preferable to integration.

Note that, according to this theory, when assessing the effects of integration, one must know not only the characteristics of the merging firms, but also who will own the merged company. If firms A and B integrate and A becomes the owner of the merged company, then A will presumably control the residual rights in the new firm. A can use those rights to hold up the managers and workers of firm B. Should the situation be reversed, a different set of control relations would result in B exercising control over A, and A's workers and managers would be liable to holdups by B.

Hart's book gives us an introduction to this world of the property rights approach to the theory of the firm. In the first part Hart considers the traditional approaches to the firm and argues that these approaches can not explain why all production does not take place within one firm or even why firms matter at all. His answers to these problems are developed via the property rights approach to the firm. Development of this theory covers chapters 2-4. Chapter 2 outlines the property rights approach, chapter 3 looks at issues that arise from this approach and chapter 4 discusses the foundations of the incomplete contracting model. In part 2 of the book Hart considers the financial structure of firms. The nature of debt and equity, the capital structure decisions of public firms, bankruptcy procedures are all covered. The book is written in a very readable manner and is non-technical enough to mean that both (advanced) undergraduate and graduate students will be able to read it. For anyone with a interest in the theory of the firm this is a must read.

A THEORY of the firm
This book presents a theory of the firm. It is targeted for graduate students in Economics. It is a must have if you plan to research in this field and it is remarkably clear! The mathematics is incredibly easy compared to other 2nd year Econ PhD books. I think even undergraduates usually know enough Math to go through the main chapters.
The book is purely theoretical and only very abstract-minded people will like it. If your specialization is applied I.O. you still might want to read the book for background knowledge, but I doubt it will be of much use to you (no econometrics here, and very little econometrics to be done even if you wanted to)

On the other hand, it is probably not going to be of any use to you if you are not a graduate student in Economics. It is *far* too abstract for management.

Now briefly to the content:
The first chapter reviews previous approaches to the theory of the firm (transaction costs...)
Property right approach and incomplete contract approach are the main point of the book. The role and the boundary of the firm are explained using concepts such as "property rights", "residual power of control", "specific investments".
The second part of the book is mainly about financial structure. Of the second part, I studied only the last chapter on voting rights. It explains how the voting structure should be set up (how many votes per share, how many classes of shares, majority voting...) according to expected private benefits of control by the incumbent management and the management making the tender offer.

So why only two stars? The theories presented here seem to me less satisfactory than many others in Economics.
I think there are fields in Economics that convey the right intuition. Hart's book does not give that impression to me. Unfortunately, I don't have anything better to propose otherwise my dissertation would be done.

THE Classic
This book is regarded as THE classic by most professional economists. We can't talk about the theory of the firm without referring to this book, which is written with exceptional clarity and depth.