Empirical relevance of efficient contract theory: inter-firm contracts

Although there has been enormous development of the theory of efficient contracts in the last 20 years, empirical tests were slow to come. However, over the last 10 years, a considerable body of evidence has accumulated, particularly in relation to contracts between firms. This paper develops a simple, integrated theoretical framework to illustrate 11 testable hypotheses. The contract theories covered include risksharing, principal-agent incentive models, transaction cost and incomplete contract models with specific investment, and the theory of relational contracting. The problems associated with empirical work on contracts are discussed before setting the hypotheses against a wide range of econometric and other empirical evidence (including work on franchising, sharecropping, subcontracting, contract duration, private institutions, experimental evidence, and a wide range of case studies). Copyright 1996 by Oxford University Press.