Initially contracts have been considered as a mechanism to save on transaction costs. However, over time they have come to be regarded a result of the need to share risks. Risks can be either exogenous to the contracting parties or generated by them (endogenous). In particular, information asymmetry creates adverse selection and exogenous randomness while endogenous randomness is due to moral hazard. The principal agent models essentially contain a formal characterization of risk sharing in contracts towards its efficiency. There is an acknowledgement that such sharing results in a propensity to take up more risky transactions and spread them to more individuals in various forms. Mature individuals are expected to regulate their activities and contain risks within acceptable bounds. Individual greed may however lead to systemic risks which are beyond their control. Efficient regulation must be conceptualized to move the system back to stability.


Risk Aversion Moral Hazard Agency Cost Adverse Selection Risk Sharing 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Agarwal RM (2007) Role of risk sharing and transaction costs in contract choice: theory and evidence from groundwater contracts. J Econ Behav Organ 63:475–496CrossRefGoogle Scholar
  2. Baker R (2006) Risk aversion in maintenance: overmaintenance and the principal agent problem. IMA J Manag Math 17:99–113MATHMathSciNetCrossRefGoogle Scholar
  3. Bolton P, Dewatripont M (2005) Contract theory. MIT Press, CambridgeGoogle Scholar
  4. Borenstein S, Busse M, Kellogg R (2007) Principal agent incentives, excess caution, and market inefficiency: evidence from utility regulation. NBER working paper 13679. Available at
  5. Coase RH (1937) The nature of the firm. Economica 4:386–405CrossRefGoogle Scholar
  6. Coase RH (1960) The problem of social cost. J Law Econ 3:1–44CrossRefGoogle Scholar
  7. Cooper R, Ross TW (1985) Product warranties and double moral hazard. Rand J Econ 16:103–113CrossRefGoogle Scholar
  8. Datta PK, Radner R (1994) Optimal principal agent contracts for a class of incentive schemes: a characterization and the rate of approach to efficiency. Econ Theory 4:483–503CrossRefGoogle Scholar
  9. Dybvig PH, Lutz NA (1993) Warranties, durability and maintenance: two-sided moral hazard in a continuous time model. Rev Econ Stud 60:575–597MATHCrossRefGoogle Scholar
  10. Emons W (1988) Warranties, moral hazard and the lemons problem. J Econ Theory 46:16–33MATHMathSciNetCrossRefGoogle Scholar
  11. Ferrall C, Shearer R (1999) Incentives and transaction costs within the firm: estimating an agency model using payroll records. Rev Econ Stud 66:309–338MATHCrossRefGoogle Scholar
  12. Holmstrom B (1979) Moral hazard and observability. Bell J Econ 10:74–91CrossRefGoogle Scholar
  13. Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360CrossRefGoogle Scholar
  14. Jullien B, Salanie B, Salanie F (1999) Should more risk averse agents exert more effort? Geneva Pap Risk Insur Theory 24:19–28CrossRefGoogle Scholar
  15. Kaufman PJ, Lafontaine F (1994) Costs of control: the sources of economic rents for McDonald’s franchisees. J Law Econ 37:417–454CrossRefGoogle Scholar
  16. Kawasaki S, McMillan J (1987) The design of contracts: evidence from Japanese subcontracting. J Jpn Int Econ 1:327–349CrossRefGoogle Scholar
  17. Lafontaine F (1992) Agency theory and franchising: some empirical results. Rand J Econ 23:263–283CrossRefGoogle Scholar
  18. Masten SE, Saussier S (2002) Econometrics of contracts: an assessment of developments in the empirical literature on contracting. In: Brousseau E, Glachant JM (eds) The economics of contracts. Cambridge University Press, CambridgeGoogle Scholar
  19. Mirrlees J (1974) Notes on welfare economics, information, and uncertainty. In: Balch M, McFadden D, Wu S (eds) Essays in economic behavior under uncertainty. North Holland, AmsterdamGoogle Scholar
  20. Murty DNP, Blischke WR (2000) Strategic warranty management: a life-cycle approach. IEEE Trans Eng Manag 47:40–54CrossRefGoogle Scholar
  21. Nichiols S (1983) Agency contracts, institutional mode, and the transition to foreign direct investment by British manufacturing multinationals before 1939. J Econ Hist 43:675–686CrossRefGoogle Scholar
  22. Rees R (1985a) The theory of principal and agent: part 1. Bull Econ Res 37:3–26CrossRefGoogle Scholar
  23. Rees R (1985b) The theory of principal and agent: part 2. Bull Econ Res 37:75–95CrossRefGoogle Scholar
  24. Sloof R, vanPragg CM (2008) Performance measurement, expectancy, and agency theory: an experimental study. J Econ Behav Organ 67:794–809CrossRefGoogle Scholar
  25. Svejner J, Smith SC (1984) The economics of joint ventures in less developed countries. Q J Econ 99:149–167CrossRefGoogle Scholar
  26. Williamson OE (1988) Corporate finance and corporate governance. J Financ 43:567–591CrossRefGoogle Scholar

Copyright information

© Springer India 2016

Authors and Affiliations

  • T. V. S. Ramamohan Rao
    • 1
  1. 1.Indian Institute of Technology KanpurKanpurIndia

Personalised recommendations