SOCIETÀ ITALIANA DI DIRITTO ED ECONOMIA
Massimo D'Antoni (Università di Siena)
Edward Iacobucci (University of Toronto)
Abstract
Economics has long neglected the role of asymmetric power relations in many transactions. Traditional economic theory assumes that voluntary exchanges are mutually beneficial, as even weaker parties would not participate if they did not benefit. In this paper, we challenge that assumption, arguing that recognizing power asymmetries is key to understanding situations where exchanges may not be equally advantageous.
Power relations arise when one party, the "principal," holds discretion over decisions that affect the other, the "agent," such as hiring, promotion, or sentencing. These relationships can be voluntarily accepted but only under conditions that limit the potential for abuse. Such limitations, stemming from contract incompleteness or non-verifiable information, serve as safeguards to protect the agent from exploitation.
We argue that restrictions on the parties' ability to exchange are integral to power relations, but they often lead to broader constraints that result in "second-best" outcomes—inefficient in the short term but efficient as guarantees for entering the relationship. These restrictions, including "inalienability rules," make power a costly institution, requiring a balance between the benefits of delegation and the potential costs of limiting mutually beneficial exchanges.