Solving the Indecisive Contract Theory: Part 2/3

Abstract

This paper shows that international trade theory has similar dilemma like the contract theory. It then applies Walras’ original law to derive two offer curves and solve the dilemma. The extension to the contract theory is simple. This model is economics meaningful, i.e., both the agent and the principal must endeavor to induce the respective partner to be mutually beneficial. The result is also more fruitful than the simple shuffling of the limited utility.

Note: Part 1 of this paper can be found at http://ssrn.com/abstract=3094153 Part 3 of this paper can be found at http://ssrn.com/abstract=3094181

Keywords: Contract Theory, Principal-Agent Dilemma, Bargaining, Offer Curve

JEL Classification: D86, L14, M55