Contract holding theory

The general idea seems to be that an unincorporated association will comprise of a group of individuals who attach themselves as members of the association in order to achieve some particular purpose. Unlike an incorporated company, an unincorporated association possesses no legal personality, it cannot be separate and distinct from its individual members, and so cannot be afforded the same rights and liabilities entitled to an independent person.

Contract holding theory

If Contract holding theory agent is risk-neutral and there are no bounds on transfer payments, the fact that the agent's effort is unobservable i. In this case, the same outcome can be achieved that would be attained with verifiable effort: The agent chooses the so-called "first-best" effort level that maximizes the expected total surplus of the two parties.

Specifically, the principal can give the realized output to the agent, but let the agent make a fixed up-front payment. The agent is then a "residual claimant" and will maximize the expected total surplus minus the fixed payment.

Hence, the first-best effort level maximizes the agent's payoff, and the fixed payment can be chosen such that in equilibrium the agent's expected payoff equals his or her reservation utility which is what the agent would get if no contract was written.

Yet, if the agent is risk-averse, there is a trade-off between incentives and insurance. Moreover, if the agent is risk-neutral but wealth-constrained, the agent cannot make the fixed up-front payment to the principal, so the principal must leave a "limited liability rent" to the agent i.

The moral hazard model with risk aversion was pioneered by Steven Shavell, Sanford J.

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GrossmanOliver D. Hartand others in the s and s. The characteristic is called the agent's "type". For example, health insurance is more likely to be purchased by people who are more likely to get sick.

Contract holding theory

In this case, the agent's type is his or her health status, which is privately known by the agent. Another prominent example is public procurement contracting: The government agency the principal does not know the private firm's cost.

In this case, the private firm is the agent and the agent's type is the cost level. The principal offers a menu of contracts to the agent; the menu is called "incentive-compatible" if the agent picks the contract that was designed for his or her type.

In order to make the agent reveal the true type, the principal has to leave an information rent to the agent i. Adverse selection theory has been pioneered by Roger MyersonEric Maskinand others in the s.

More recent developments known as the theory of incomplete contractspioneered by Oliver Hart and his coauthors, study the incentive effects of parties' inability to write complete contingent contracts, e. A leading application of the incomplete contracting paradigm is the Grossman-Hart-Moore property rights approach to the theory of the firm see Hart, Because it would be impossibly complex and costly for the parties to an agreement to make their contract complete, [16] the law provides default rules which fill in the gaps in the actual agreement of the parties.

During the last 20 years, much effort has gone into the analysis of dynamic contracts. Important early contributors to this literature include, among others, Edward J. GreenStephen Spear, and Sanjay Srivastava.

George Akerlof described adverse selection in the market for used cars. In certain models, such as Michael Spence 's job-market model, the agent can signal his type to the principal which may help to resolve the problem.contract-holding theory is more advantageous as a solution to the property holding problems in UAs, particularly as the scope of its application is that much wider than the T analysis approach.

disadvantage of contract holding theory.

IPAD Video lessons

The second video discusses contract holding theory and how unincorporated associations hold property. The third video looks at the ways in which gifts can be made to unincorporated associations and the problems associated with that. Contract theory definition is - a theory or the group of theories holding that society originated in a contract.

a theory or the group of theories holding that society originated in a contract See the full definition. Gift to existing members as an accretion to their funds and dealt with by the association's rules - *contract holding theory*. Issue: Dissolution of unincorporated associations - When an unincorporated association dissolves, problems arise as to the ownership of any surplus funds.

Gift to existing members as an accretion to their funds and dealt with by the association's rules - *contract holding theory*. Issue: Dissolution of unincorporated associations - When an unincorporated association dissolves, problems . contract-holding theory is more advantageous as a solution to the property holding problems in UAs, particularly as the scope of its application is that much wider than the T analysis approach.

disadvantage of contract holding theory.

The Contract Holding Theory and Unincorporated Associations.