Economic Analysis of Contract Law after Three Decades: Success or Failure?

Abstract

Law and economics has failed to produce plausible descriptive theories of contract doctrines. This paper documents these failures and suggests that they are due to a methodological problem involving the concept of transaction costs. If transaction costs refer to writing or information costs, then rational individuals would agree to complex contracts that are not in fact observed, and contract law would, for the most part, have no other function than that of specifically enforcing contracts. If transaction costs refer to limits on foreseeability and other cognitive restrictions, then law and economics assumes implausibly both that people are rational enough to allow legal rules to influence their investment and breach decisions, but not rational enough to allow legal rules to influence contractual design. Implications for normative analysis are discussed, and non-economic approaches to contract law are surveyed and criticized.

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