Contracts between Legal Persons
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Description
Contract law and the economics of contract have, for the most part, developed independently of each other. While contract law has existed for centuries, if not millennia, the economic analysis of contract is both very recent and largely divorced from the content and structure of contract law. Current reviews of contract theory, such as Laffont and Martimort (2002) and Bolton and Dewatripont (2005), do not discuss either the substantive law of contract or the role that courts play in enforcement. In this chapter, we begin to bridge this gap. We briefly review the notion of a contract from the perspective of a lawyer and then use this framework to organize the economic literature on contract. The review thus provides an overview of the literature for economists who are interested in exploring the economic implications of contract law. The title, “Contracts between Legal Persons,” limits the review to that part of contract law that is generic to any legal person. A legal person is any individual, firm, or government agency with the right to enter into a binding agreement. Our goal is to discuss the role of the law in enforcing these agreements under the hypothesis that legal persons have well defined goals and objectives. The possession of well-defined preferences does not imply that legal persons never make mistakes. In fact, a key ingredient to understanding the observed form of contract law requires the introduction of some imperfections in decisionmaking. Since the seminal work of Herbert Simon (1982), there has been little disagreement that a complete understanding of human institutions requires the incorporation of errors in decisionmaking. However, there is little agreement regarding the best way to achieve this goal. In this review, we follow the widely accepted hypothesis that imperfect and asymmetric information are key ingredients of any theory of contract form. We show that these elements are sufficient to tie together the various strands of the literature. We then outline a plan for future research. The review is divided into three substantive parts. Section 2 focuses on the primary legal concepts on which contract law rests—including the notion of a legal person and what is meant by an enforceable agreement. We focus on the substantive remedial regime that determines how contracts are enforced and on two features of the process of adjudication—fact-finding and interpretation—that determine what obligations the parties have and when they have been breached. Section 3 examines how the implicit assumptions underlying the economic literature on contract compares to the substantive law of remedy. Economic models of contract make stylized assumptions regarding how the law enforces contracts. In many cases, these assumptions are consistent with existing law. In some cases, particularly when the contract requires a person to act in a particular way, the implicit assumptions are inconsistent with existing law in such jurisdictions as the United States. This inconsistency is manifested in some recent work that builds on results in mechanism design. The same inconsistency may help explain, as Tirole (1999) observes, the gap between the predictions of these models and observed contract forms. In addition, Section 3 discusses the literature on economic analysis of law that begins to bridge the gap between the spare assumptions on remedial regime in the economic literature and the complexity of the law. Section 4 discusses the sparse literature on fact finding and interpretation. This literature asks two questions: 1. When parties write an incomplete contract, how should a court determine the obligations that the parties have? 2. How do courts find facts? In terms of the economic literature, what is the technology of verification? Section 5 concludes the chapter. We deploy the conceptual scheme of contract law summarized in Section 2.2 to organize a summary of the literature on the economics of contract. Our characterizations of some of the underlying economics literature may thus seem a bit askew, but we hope that the legal perspective will open additional avenues of research.
Source Publication
The Handbook of Organizational Economics
Source Editors/Authors
Robert Gibbons, John Roberts
Publication Date
2013
Recommended Citation
Kornhauser, Lewis A. and MacLeod, W. Bentley, "Contracts between Legal Persons" (2013). Faculty Chapters. 1020.
https://gretchen.law.nyu.edu/fac-chapt/1020
