Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on...

We develop a model of hierarchies based on the allocation of authority. A firm's owners have ultimate authority over a firm's decisions, but they have limited time or capacity to exercise this authority. Hence owners must delegate authority to subordinates. However, these subordinates also have...

We design a new, implementable capital requirement for large financial institutions (LFIs) that are too big to fail. Our mechanism mimics the operation of margin accounts. To ensure that LFIs do not default on either their deposits or their derivative contracts, we require that they maintain an...

In the last fifteen years or so, lawyers working in law and economics and economists with an interest in legal matters have turned their attention to the topic of bankruptcy. A large amount of work has resulted, both theoretical and empirical, some of which has been concerned with the...

We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the...

We argue that a contract provides a reference point for a trading relationship: more precisely, for parties' feelings of entitlement. A party's ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades...

We view a contract as a list of outcomes. Ex ante, the parties commit not to consider outcomes not on the list, i.e., these are quot;ruled outquot;. Ex post, they freely bargain over outcomes on the list, i.e., the contract specifies no mechanism to structure their choice; in this sense outcomes...

In the thirty or so years since the Modigliani-Miller theorem, scholars have worked to relax the theorem's assumptions in order to obtain a better understanding of the capital structure of firms. This work has produced some important insights but has not yet delivered a fully coherent theory of...

We develop a theory of optimal capital structure based on the idea that debt and equity differ in their priority status relative to future corporate cash pants. A company with high (dispersed) debt will find it hard to raise new capital since new security-holders will have low priority relative...

In this article I argue that it has been hard to make progress on Coase's theory of the firm agenda because of the difficulty of formalizing haggling costs. I propose an approach that tries to move things forward using the idea of aggrievement costs, and apply it to the question of whether a...