Book reviews

Abstract

Firms, Contracts, and Financial Structure. Oliver Hart. Oxford, U.K.: Clarendon Press, 1995. 228 pp., $49.95 (hardcover), $19.95 (paper). ISBN 0-19-828850-6. Why does General Motors make its own glass but not its own tires? Why are some firms heavily debt financed while others are not? These questions are examples of some of the most important issues of corporate finance: “What determines the firm’s boundaries?” and “What determines the firm’s financial structure?” The growth of the literature on these questions has, of late, been astonishing. 1 This growth has been fueled largely by the development of the new “economics of contracts” and the realization that those techniques can illuminate the issues in a way not previously available. Oliver Hart is one of the foremost practitioners of the “contracts approach” to corporate finance. His new book, based in part on his Clarendon Lectures given at Oxford University in May 1993, summarizes, synthesizes, and puts in context Hart’s research on the two issues mentioned previously. The exposition takes advantage of Hart’s and his collaborators’ (Sanford Grossman and John Moore) ability to find simple models that capture the essence of their ideas, with a liberal use of numerical examples. As a result, the material is easily accessible to anyone with even a little training in microeconomics and requires almost no background in game theory. Although it is not clear to whom the book is addressed, I expect it to be essential reading for any economics or finance Ph.D. student interested in corporate finance. Thus, this volume should contribute to the development of the contracts approach to corporate finance.