ABSTRACT
This chapter offers a reconstruction of the debate about the nature of the firm as a set of contracts, from its early days when the matter understood the reasons for internalizing transactions into firms replacing portions of markets to its developments combining agency theory with oligopolistic interaction. The climax of the view of the firm as a contract or a set of contracts is agency theory, in which a principal delegates a crucial activity to an agent. The principal— agent relationship may take place simply in a condition of hidden action or in a condition combining hidden action with hidden information, which implies that the principal cannot reconstruct the motivations of the agent’s unobserved behaviour. Moral hazard may commonly affect akin situations in which the firm is modelled as a structure in which a manager is monitoring a group of workers whose efforts enter the production function as input in a non-separable way.
