The Wasteful Grossman-Hart Contract Theory: An Adverse Consequence of Expected Utility

Abstract

This paper shows how expected utility shortcut can result in some adversary conclusion: excessive cost. It then demonstrates graphically how Grossman and Hart (GH) have twisted the agent’s model to form the principal model. A complete principal-agent model is then introduced, and is proved to be a bargaining model. Although there is generally no clear-up solution to the bargaining problem, GH’s method is arbitrary and their result detrimental.