Page info: *Author: Mathiesen, H. *Document version: 2.2. *Copyright 1997-2019, H. Mathiesen. Legal notice. 


Exhibition: Examples of explanatory and predictional theory


Introduction: The mentioned authors and theories are only meant as a humble illustration of how we could categorize some of the many research areas in economics as either predictional or explanatory theories. This distinction between explanatory theories and predictional theories is somewhat artificial, since all the theories have at least an element of both approaches. E.g. some theory under the name of agency theory is purely mathematical (e.g. principal-agency theory) and other agency theory is mainly verbal (e.g. positive agency theory). Also a branch of theory like industrial organization was originally explanatory in nature primarily using storytelling and non-mathematical theories such as Bain & Masons structure-conduct-performance theory. However, the Chicago school turned it around (about 1972) and today most economists think of mathematical (predictional) economics when they use the word industrial organization.



Theories that mainly are predictional in nature (unrealistic but simple and clear)












Marshall, A. 1890:

Substitution at the margin. Perfect competition.


Walras, L. 1954:

Equilibrium; Dynamics in law of supply and demand.


Arrow, K. 1969: Distinguish transaction costs (from production cost) as cost of running the economic system.

Pigou, A. C. 1920:

Private efficiency; Social efficiency.


Bohm, P. 1973:

Market imperfections

The classic textbook Tirole [1988], 'Industrial Organization' is representative of the field as it is today. Many theories go under the name of industrial organization, including many issues in agency theory and welfare economics, asset specific contract theory; Monopoly theory; Price discrimination; Strategic interaction

Wilson 1968, Arrow, K. 1971: Risk sharing.


Mayerson, R. 1979, 1985, Guesnerie, R. & Laffort, J. J.1984: Asymmetric information.


Grossman & Hart 1986:

Vertical integration.


Hart & Holmstrom 1987:



Jensen & Meckling, 1976, Fama & Jensen 1983, Kosnik 1987: Ownership and capital structure.

Sharpe, W. F. 1963:


Modigliani & Miller 1958, 1963:

Capital structure; WACC; Cash flow models.

Fama, E. F 1970: Capital market efficiency.


Theories that mainly are explanatory in nature (realistic but complex and unclear)


Transaction Cost Economics

Law &




Accounting Theory



Commons, John 1934:

Transaction as the basic unit of analysis.


Coase, R. H. 1937, 1960:

Markets / firms; Comparative institutional analysis.


Williamson, O.E. 1975, 1985:

Transaction cost economics; Specific investment; Opportunism.

Klein & Crawford & Alchian 1978:

Quasi rents.


Alchian, A. & Demsetz, H. 1972,  Teece 1980, Klein & Leffler 1981, Alessi 1983:

Nexus of contracts; Non-separability of production.




Galabresi, G. 1970:

Transactional, institutional analysis on Tort Law.


Fuller, Lon L. 1963, Macniel, I. R. 1974, 1978:

Contract Law.


Posner, R. 1986, Cooter & Ulen 1988, Polinsky 1989:

Law & Economics.

Taylor, F. 1911, Weber M. 1904:

Scientific management; Bureaucracy.


Knight, F. 1921:

Risk; Uncertainty; Moral hazard.


Bernard, C. 1938:

Formal organization; Intended rationality.


Mayo, E. 1945, Maslow A. 1954:

Human relations; Human resources; Corporate culture.


Simon, H. 1958:

Bounded rationality.


Mintzberg, H.1983:

Contingency theory.

Many contributors. The double entry account was originally developed in 13. century in Italy in Venice and Genua.

The field is in many aspects the empirical counterpart to finance theory. The contributors are therefore overlapping those of Finance Theory. E.g. Jensen, M., Fama, E. F.

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