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ECO320 Final

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University of Toronto St. George
Donald Dewees

Economic Theory of Contract The purpose of a contract is to secure performance that occurs later than the agreement Contract formationOffer and promiseAcceptanceConsideration Failure to perform breach of contract Bargain theory of contracts a promise is legally enforceable if it is given as part of a bargain otherwise a promise is unenforceableBargaining is a dialogue on value to agree on a priceThree elements in the dialogue offer acceptance and considerationSometimes business practices and social conventions prescribe the signals for making and accepting offers at an auctionSometimes contract law and statutes specify procedures for offer and acceptance for landPromisor refers to the person who gives a promise and promisee refers to the person who receives a promiseIn a bargain the promisee induces the promisor to give the promise the considerationMoneyforapromise goodsforapromise serviceforapromise and promiseforapromiseEach bargain involves reciprocal inducement promisor gives promise as inducement to promiseePromises secured by consideration are enforceable and promises lacking are unenforceableMust have meeting of the mindsdiscussing the same thing otherwise no offer and no acceptance just a failure to communicateA contract is fair when the value of the promise is proportional to the value of the considerationCourt should enforce promises induced by consideration regardless of whether the consideration was equivalent in value to the promise as promisor found it adequate to induce promiseException some courts sometimes refuse to enforce extremely onesided bargainsDetermining whether equivalents were exchanged requires courts to obtain a lot of information and supervising all bargains for fairness would burden the courts and inhibit commerceIn civil law relies upon the idea of cause will theory a binding contract requires an intention by the parties to be boundIf so their wills meet which creates contractRemedy for breach of enforceable promisesPromisee is entitled to the benefit of the bargainbenefit promisee could reasonably expect from performance of the promiseExpectation damages Criticism of the bargain theoryBargain theory denies enforcement when the promise did not arise from a bargain even if both parties want the promise to be enforcedResponsive maximizes the wellbeing of people while dogmatic sacrifices in favour of other endsDogmatic legal theory that frustrates the desires of the people affected by the lawResponsive legal theory that satisfies the desires of the people affected by the lawContemporary courts prefer to be responsive so often enforce firm offers and gift promisesBargain theory calls for the routine enforceability of any bargain regardless if it deception and trickery or such Economic theory of contractWhenever a change in the law makes someone better off without making anyone worse off pareto efficiency requires changing the lawParetoefficient lawresponsive lawEconomic efficiency requires enforcing a promise if the promisor and promisee both wanted enforceability when it was made Cooperation and commitmentMaking of promises concerns deferred exchanges transactions that involve passage of time for completion which creates uncertainties and risks that are obstacles to exchange and cooperationEnforceability of promises encourages exchange and cooperationAgency gameFirst player decides whether to put a valuable asset under the control of the secondIf yes second player decides whether to cooperate or appropriateCooperation is productive productivity could be profit interest etcParties divide the product of cooperation so both benefitsAppropriation is redistributive benefits the second player at the expense of firstIf unenforceable contract Player 2 will appropriate and player 1 will then not investIf enforceable investing is the first players best move and cooperating for secondThe first purpose of contract law is to enable people to cooperate by converting games with noncooperative inefficient solutions to games with cooperative efficient solutionsEfficiency requires choosing the cell that maximizes the sum of the payoffsEnforceability of the promise enables the uncle to make a credible commitment to his nephew and a credible commitment enables them to cooperateIn game theory a commitment is achieved by foreclosing the opportunity to appropriate by high cost of liability for breachA commitment is credible when the other party observes the foreclosing of an opportunityCircumstances for contracting involve the need to reduce choices to induce relianceEfficiency may sometimes require enforcing a promise even though one of the parties did not want enforceability user making a deceitful promises holds liable to discourage behaviour InformationAn important part of fostering commitment and cooperating between contracting parties is the exchange of information Second purpose of contract law is to encourage efficient disclosure of information within the contractual relationshipCrafting rules of formation and enforcement that guides parties what information they have obligation to divulge Performance Remedy is the price paid by the promisor for breaching the contractThe higher the price of breach the stronger the promisors commitment to performThe third purpose of contract law is to secure optimal commitment to performingPerfect expectation damagesActual performance and breach by selfinterested shortsighted promisor
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