Incomplete Contracts and Stakeholder Theory

If market transactions are optimal, why do so many transactions occur within firms themselves? Ronald H. Coase explains this phenomenon by arguing that market transaction costs differ from intra-company transaction costs and that clear intra-intra-firm property rights have the effect of reducing transaction costs. But what exactly are the relevant transaction costs, and what factors determine them? Oliver Hart argues that market contracts are incomplete, and that the key to improving efficiency is putting the power to deal with these unspecified circumstances into the hands of owners within the same entity.In this paper, I argued that, the development of the theory and practice of business ethics as well as China’s innovative practice in recent decades provide a new perspective, one that is especially relevant to the issues raised by Case and Hart and that bear directly on the reform of China’s state-owned enterprises.