The fully specified contract and its reconstruction by default rules

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Chapter 12 in The Economic Analysis of Civil Law, 2022, pp 363-377 from Edward Elgar Publishing

Abstract: To better understand the economic function of contract law, it is helpful to familiarize oneself with the thought experiment of the fully specified contract. This contract is deemed to exist if the parties to the contract have agreed on the allocation of all risks associated with the performance of the contract prior to its conclusion. If all risks are assigned to the supplier, she will demand a high price, which will at least contain the expected value of these risks. However, if the buyer assumes all risks, the price will be correspondingly low. It is important that the negotiating parties do not spread the risks arbitrarily when negotiating the fully specified contract. Rather, if they behave rationally, they will increase their joint surplus by choosing a contract which can avoid, insure or otherwise manage a specific risk with the least effort.

Keywords: Economics and Finance; Law - Academic (search for similar items in EconPapers)
Date: 2022
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