BA 3340 Lecture Notes - Lecture 4: Vehicle Insurance, Expected Loss, Marginal Cost
Document Summary
Every ime that they are assigning contracts there might be conlicts in these relaionships. The irm wants the worker to work, but the worker wants to be lazy. Shareholders want short-term returns, but the irm wants long-term returns. The irm wants suppliers to supply high-quality inputs, but the suppliers want to save many and provide low-quality inputs. It is in everyone"s interests to come together and form organizaions that support specializaion and trade. But, once they have established these organizaions, they are incenives to misbehave. So, paries must safeguard themselves against the bad behavior of others before they enter into relaionships with them. A contract is a voluntary agreement to organize a transacion. An explicit contract speciies verbally or in wriing what each party"s obligaions are. An implicit contract is a set of expectaions that each party has about others" behaviour. (no signatures). An implicit assumpion in the economics of contracts is that they are enforced.
