In
economics,
contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of
asymmetric information. Because of its connections with both
agency and incentives, contract theory is often categorized within a field known as
Law and economics. One prominent application of it is the design of optimal schemes of managerial compensation. In the field of economics, the first formal treatment of this topic was given by
Kenneth Arrow in the 1960s.