Testing Contract Theory: a Survey

Since the early seventies, the development of the theoretical literature on contracts has been nothing short of explosive. The study of more and more sophisticated abstract models has gone hand in hand with the use of the tools of the theory to better understand many ...elds of economics, such as industrial organization, labor economics, taxation, insurance markets or the economics of banking. However, it is only fair to say that the empirical validation of the theory has long lagged behind the theoretical work. Many papers consist of theoretical analyses only, with little attention to the facts. Others state so-called stylized facts often based on fragile anecdotal evidence and go on to study a model from which these stylized facts can be derived. Until the beginning of the eighties, empirical tests using actual data and ¤We thank our discussant Patrick Legros and Je¤ Campbell, Lars Hansen, Jim Heckman, Rob Townsend and Bruce Shearer for their comments. This paper was written while Salanié was visiting the University of Chicago, which he thanks for its hospitality.