Making the Case for Contract Theory

Abstract

Economics has changed a great deal in the last thirty years and there is every reason to think that the changes in the next twenty to thirty years will be at least as great. Although theory may not be as prominent as it once was, it remains essential for understanding the (increasingly) complex world we live in. One cannot analyze the bewildering amount of data now available, or make sensible policy recommendations, without the organizing framework that theory provides. Contract theory is a good example of an area where great progress has been made in the last thirty years, and yet where much remains to be done. In this short essay I will discuss some of the major themes of contract theory and also issues that are still not well understood.