Economics & Finance / Business & Management / Corporate Strategy & Governance

Corporate, Contracts, and Financial Structure, explores how power and control influence economic

Corporate, Contracts, and Financial Structure

Oliver Hart

Nobel Prize in Economics Papers Series： This paper, excerpted from Oliver Hart's classic work Corporate, Contracts, and Financial Structure, explores how power and control influence economic organizations in environments with incomplete contracts. The author argues that because people cannot foresee all possible future scenarios, contracts inevitably contain loopholes; therefore, residual control rights (i.e., the right to decide on the unspecified use of assets) become crucial in defining ownership. The book analyzes the causes of firm boundaries through property rights theory, arguing that the allocation of asset ownership should aim to incentivize relationship-specific investments. If two firms have highly complementary assets, concentrating power in one party through mergers usually improves overall efficiency; conversely, if assets are independent, maintaining a decentralized, non-integrated structure is more ideal. Furthermore, the work extends this logic to financing structures and bankruptcy proceedings, providing a profound theoretical framework for understanding the financial decision-making and governance mechanisms of modern enterprises.