Browse Definitions :
Definition

contract theory

Contract theory is the study of how people and organizations develop legal agreements in situations with uncertain conditions, unknown factors and information asymmetry. Contract theory applies to both multi-party negotiations between a principal and one or more agents and contracts created by a single individual or organization to specify details of multi-party agreements, such as employee contracts.

Ideally, a contract specifies the responsibilities and requirements of both parties so meticulously that there can be no room for dispute or misunderstanding. However, that ideal may never be achieved, for various reasons. Moral hazard, one model within contract theory, is the risk that one party to a transaction is not acting in good faith.  For example, that party may have withheld important  information or provided misleading information or may have undisclosed motivation driving elements of an agreement that are being negotiated. Moral hazard often involves the assumption of risks that disadvantage the party with less information. Other models within contract theory include adverse selection, in which the principal party is not fully informed of the agent’s risk factors, and signaling, in which the agent reliably conveys information about itself to the principal, for example, a job applicant listing qualifications that match the hirer’s list of requirements.

Contract theory is a special application of game theory, which is the study of mathematical models of negotiation, conflict and cooperation between individuals, organizations and governments. Central questions of game/contract theory include why an individual makes a particular decision and how the decisions made by one individual affect others.

See a lecture on contract theory:

This was last updated in June 2016

Continue Reading About contract theory

SearchCompliance
  • ISO 31000 Risk Management

    The ISO 31000 Risk Management framework is an international standard that provides businesses with guidelines and principles for ...

  • pure risk

    Pure risk refers to risks that are beyond human control and result in a loss or no loss with no possibility of financial gain.

  • risk reporting

    Risk reporting is a method of identifying risks tied to or potentially impacting an organization's business processes.

SearchSecurity
  • Melissa virus

    Melissa was a type of email virus that initially become an issue in early 1999.

  • biometric payment

    Biometric payment is a point-of-sale (POS) technology that uses biometric authentication physical characteristics to identify the...

  • Twofish

    Twofish is a symmetric-key block cipher with a block size of 128 bits and variable-length key of size 128, 192 or 256 bits.

SearchHealthIT
SearchDisasterRecovery
  • What is risk mitigation?

    Risk mitigation is a strategy to prepare for and lessen the effects of threats faced by a business.

  • fault-tolerant

    Fault-tolerant technology is a capability of a computer system, electronic system or network to deliver uninterrupted service, ...

  • synchronous replication

    Synchronous replication is the process of copying data over a storage area network, local area network or wide area network so ...

SearchStorage
  • hard disk drive (HDD)

    A computer hard disk drive (HDD) is a non-volatile data storage device.

  • Remote Direct Memory Access (RDMA)

    Remote Direct Memory Access (RDMA) is a technology that enables two networked computers to exchange data in main memory without ...

  • storage (computer storage)

    Data storage is the collective methods and technologies that capture and retain digital information on electromagnetic, optical ...

Close