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Textbook Notes- Chapter 6 An Economic Theory of Contract

by OC4

Department
Economics
Course Code
ECO320H1
Professor
Robert Barber

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Chapter 6: An Economic Theory of Contract
1st Purpose of Contract Law: ^vo}o}}vÀPuÁ]Z]v((]]v}]}v]v}PuÁ]Z
((]]v}]}v_~vo}o}}}Ç}vÀ]vPPuÁ]Zv}v-cooperative solutions
into games with cooperative solutions)
2nd Purpose of Contract Law: ^v}µP((]]v]o}µ}(]v(}Á]Z]vZ}vµoo]}vZ]_
3rd Purpose of Contract Law: ^µ}]uo}uu]uv}(}u]vP_
4th Purpose of Contract Law: ^µ}]uoo]v_
5th Purpose of Contract Law: ^u]v]uv]}v}}(vP}tiating contracts by supplying efficient
default terms and regulations_
6th Purpose of Contract Law: ^(}vµ]vPo]}vZ]UÁZ]Z}Z}ou}(}}]}v
Á]Zoo]v}vZ}µ}v(}}v_
- Foreclosing opportunity to appropriate:
o Commitment
o High cost of liability for breach (higher the cost of liability, the stronger the commitment
to perform)
- Credible commitment t other party must observe foreclosing of an opportunity
- Reduce choices = induce reliance
- Enforceability = credible commitment = cooperation
- Deceptive offer =/= basis for cooperation
^Z}u]}Z((]]v]vv]À(}(Xvv}v-perf; When the liability for breach = the benefit
(}P}vÇZ}u]_
Î Promisor internalizes the cost for breach
Î Promisor has efficient incentives to perform when liability internalizes the costs of breach
Reliance
- Promisor invests in performing, Promisee invests in reliance
Default Rules/Gaps:
- Explicit terms in court usually prevail
- When explicit terms prevail, implicit terms fill gaps by default
- Z(µou[t gap filling terms
- Replacing inefficient default terms w/ efficient terms = surplus (Both parties to a contract can
benefit with replacement)
- Efficient default rules impose trade-off between transaction costs/risk bearing
Chapter 7: Topics in the Economics of Contract Law
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