The Law and Economics of Costly Contracting

  title={The Law and Economics of Costly Contracting},
  author={Alan G. Schwartz and Joel Watson},
  journal={Yale Law School},
In most of the contract theory literature, contracting costs are assumed either to be high enough to preclude certain forms of contracting or low enough to permit any contract to be written. Similarly researchers usually treat renegotiation as either costless or prohibitively costly. This article addresses the middle ground between these extremes, in which the costs of contracting and renegotiation can take intermediate values and the contracting parties can themselves influence these costs… 
Contracting with reading costs and renegotiation costs
In the economy, contract formation and recontracting are costly, and these costs have important implications for contractual outcomes and economic objectives like efficiency. In this dissertation, I
Completing Contracts in the Shadow of Costly Verification
Contract theory typically holds that verification costs are obstacles to complete contracting; yet real‐world contracts often contain provisions that seem costly to verify. We show how verification
A Theory of Contracts with Limited
We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the
A Theory of Contracts with Limited Enforcement
We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the
The Law and Economics of Incomplete Contracts
▪ Abstract Individual actors want to make their promises enforceable in order to motivate mutually profitable investments. But parties cannot easily design contracts that maximize beneficial
Incentive Contracts with Enforcement Costs
Legal enforcement of contracts is expensive and therefore parties will typically negotiate to avoid these costs. However, if negotiation takes place under asymmetric information, enforcement will
Incomplete Contracts and Renegotiation
The parties to a contract typically make a lot of decisions during the time it is in force, and the paper is based on the premise that it takes time to be involved in any one of these decisions.
Contract law and Contract theory. A survey and some considerations
In this study we parallel Contract theory and Contract law and over a few considerations about the link between the two literatures. First, we highlight that studies in Contract theory can be classi
Contract Interpretation and Contextual Asymmetry
A problem in economic contract theory is to know when parties can create efficient investment incentives with contracts. A problem in legal contract theory is to develop rules to guide courts in
Incentive Provision When Contracting is Costly
We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. We show that contract costs matter for incentive


Incomplete Contracts and Complexity Costs
This paper investigates, in a simple risk-sharing framework, the extent to which the incompleteness of contracts could be attributed to the complexity costs associated with the writing and the
Incentives Versus Transaction Costs: A Theory of Procurement Contracts
Inspired by facts from the private-sector construction industry, we develop a model that explains many stylized facts of procurement contracts. The buyer in our model incurs a cost of providing a
Unforeseen Contingencies and Incomplete Contracts
We scrutinize the conceptual framework commonly used in the incomplete contract literature. This literature usually assumes that contractual incompleteness is due to the transaction costs of
Simplicity and Complexity in Contracts
Standard economic models of contract imply that contracts should be highly "complex," by which we mean (1) rich in the expected number of payoff-relevant contingencies; (2) variable in the magnitude
Contract Theory and the Limits of Contract Law
This article sets out a normative theory to guide decisionmakers in the regulation of contracts between firms. Commercial law for centuries has drawn a distinction between mercantile contracts and
Courts of Law and Unforeseen Contingencies
We study a contracting model with unforeseen contingencies in which the court is an active player. Ex-ante, the contracting parties cannot include the risky unforeseen contingencies in the contract
Cooperative Investments and the Value of Contracting
Recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting. These studies typically considered
Quantity and Price Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke
M UCH economic activity takes place within a framework of complex, long-term contracts. While economists have shown increased interest in these contracts, surprisingly little is known about them, or,
Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach
The paper uses a generalized Nash bargain to analyze input levels, profits, and wages in the absence of binding contracts, and compares these with the convenitional binding contracts model. It is
Investments, Holdup, and the Form of Market Contracts.
The authors analyze incomplete contracts to induce efficient investment. With exogenous switching costs, fixed-price contracts are efficient, generate some rigidity in prices, are renegotiated