Incomplete Contracts and Economic Organization: Brian Loasby and the Theory of the Firm

The paper begins by providing a brief overview and discussion of the modern
economics of organization, concentrating in particular on the work of incomplete contract theorists. I then turn to a discussion of Loasby’s view of the firm and incomplete contracts. The point here is that while Loasby begins from the same recognition as modern incomplete theorists, that contractual incompleteness is a necessary component of a theory of the firm, the causes and consequences of contractual incompleteness are widely different. Thus, Loasby sees incompleteness as a distinct virtue because it allows for organizational learning, whereas incompleteness in the modern economics of organization is seen as a distinct problem because it opens the door to incentive conflicts. I end by speculating on how Loasby’s non-mainstream ideas on economic organization may be related to some relatively mainstream ideas about alternative gameforms and real options.