The 7 Key take-aways on how to get your contract effectively structured, a must read on contract management for decision makers!
Our congratulations to Professor Holmström and Professor Hart for their work in Contract Management, as stated by the Committee, which ‘has had a major impact on Organizational Economics and Corporate Finance, and it has deeply influenced other fields such as industrial organization, labor economics, public economics, political science, and law”.
Also this work “is invaluable in helping us understand real-life contracts and institutions, as well as the potential pitfalls when designing new contracts”.
As we at BloomingContracts.com are echoing day-in-day-out to our customers : Contracts Are Economic Instruments to Manage the Outcome of Your Business!
The contract structure drives your business outcomes and ultimately results into your P&L and Balance Sheet Statements for public and private organisations.
The 7 Key Take-Away on the work of Mr. Holmström and Mr. Hart on their Contract Theory,
- Entities working together do have different interests. Today, conflicts of interests are often mitigated by contracts.
- Well-designed contracts provide incentives for the contracting parties to get a future benefit from working together.
- Incentives must be aligned to get the benefit from working together.
- Optimal contract should link compensation to all outcomes that can be measured and provide information about actions that have been taken.
- Imprecise performance measurement is not the only hurdle to structure efficient contracts. Parties are frequently unable to realistically articulate detailed contract terms in advance. The problem then becomes how to design the best rudimentary contract. The best possible outcome is an incomplete contract.
- The Incomplete contract that cannot explicitly specify what the parties should do in future eventualities, must instead specify who has the right to decide what to do when the parties cannot agree.
- In complex contracting situations, decision rights, allocating control and allocating property and therefore becomes an alternative to compensate for performance.
If you would like to know more about the work of Mr. Holmström and Mr. Hart and you’re a member of the IACCM, join the webinar Thursday on 13th October or alternatively you can download the Nobel Prize Economics: The Contract Theory.