ABSTRACT
This chapter briefly reviews the theories of institutional economics and induced institutional innovation. The transaction costs theory of firm governance structure and the environmental disequilibria induced institutional innovation of the new institutional economics have laid the theoretical foundation for the entire research, and guided the search for the factors that may have had influences in Township and Village Enterprises' (TVEs) contractual form determination and innovation. The chapter formulates a principal-agent model to capture the effects of those factors, and to illustrate the mechanism through which the external variations are translated into the determination and evolution of TVEs’ contractual structure. The contractual form applied to a firm defines the governance structure of the firm. It governs the relationship between the principal and the agent in the operation of the firm. The organizational form, or the governance structure, of the firm is closely related to the property rights structure.
