Ch 8 An Economic Theory of Contract | Cooter & Ulen (Part 1) | Law and Economics

Notes:
Property law encourages people to maximize the value they derive from their property
by preventing involuntary appropriation. Contract law prevents opportunism in
exchanges involving the passage of time.
Two Fundamental Questions in Contract Law
1. What promises should be enforced?
2. What should be the remedy for breaking enforceable promises?
I. Bargain Theory: An Introduction to Contracts
A. What promises should be enforceable at law?
1. The early view was that a promise is legally enforceable if it is part of a bargain. Three
conditions were required for a bargain to have been struck: offer, acceptance and
consideration. Of these three, consideration is the least straightforward. In the context
of contracts, consideration consists of something the promisee gives the promisor in
exchange for the promise. The presence of consideration was required to make a
contract enforceable.
The promisor is giving something to the promisee in the future in exchange for
something the promisee gives the promisor now. For example, a home buyer (the
promisee) gives a builder (the promisor) a down payment on a house that the builder
will deliver to the buyer at some future date.
B. Remedies for the breach of enforceable promises
1. Expectation damages. Basically this is a measure of the value to the promisee if the
contract had been fulfilled. The underlying assumption is that the promisee is entitled
to “the benefit of the bargain”. From an economic perspective, if expectation damages
are set correctly, the promisee is indifferent between performance and breach.
It is also important to recognize that if one party loses as a result of enforcement of a
contact, so long as the gain to the second party is greater than the first party’s loss, the
exchange is efficient if judged by the Hicks-Kaldor criterion.
C. A Criticism of the Bargain Theory
1. The problem with the bargain theory approach is that, in many cases, consideration
could be absent for justifiable reasons. Moreover, both parties (the promisor and the
promisee) could want the promise to be enforceable at the time that the agreement was
made, implying a cooperative surplus from the exchange. However, the lack of
consideration would prevent the promise from being enforceable. Such a legal theory
would prevent efficient exchange in certain cases. It is important to note that in many
cases, American courts do not adhere to the bargain theory of contracts and, as such,
encourage more economically efficient outcomes than would be the case otherwise.
2. Dogmatic law versus responsive law
* Strictly adhering to the bargain theory is an example of dogmatic law.
* Modifying the law to maximize the well-being of society is an example of
responsive law
#economics #ecohons #du #semester6 #lawandeconomics #cooter&ulen #contract #contracttheory #bargain

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