Niklas Lars Hallberg

Senior lecturer

Asymmetric contracting capabilities and the entropic effect of learning to contract

Author

Niklas Lars Hallberg

Summary, in English

How do contracting capabilities affect contractual preferences and economic institutions? According to the learning to contract literature, contractual parties over time learn to discover more efficient ways of governing exchange relationships, thereby reducing transaction costs when governance structures are gradually better aligned with transaction attributes. However, the introduction of learning dynamics into transaction cost economics is also associated with an unexplored dark side. Parties in contractual relationships are likely to develop asymmetric contracting capabilities because of differential initial endowments and path-dependency in learning processes. We argue that asymmetric contracting capabilities function as appropriation factors that lead to a shift in the expected distribution of payoffs between the contracting parties, which affect incentive alignment and the parties’ preferences over different contractual forms. A counterintuitive implication of the argument is that strong contractual learning dynamics may lead to exacerbated incentive conflict and less stable economic institutions.

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