Sara Tatke

The Application of Economics to Contract Law

Started Mar. 7, 2022

Abstract or project description

This paper aims to understand the relationship between economic concepts and contract law issues to generate efficient contractual outcomes. In other words, outcomes where both parties reap the maximum benefits through the contract. It explores ideas such as the Edgeworth Box, the Contract Curve, the Endowment Effect, and theories such as Coase theorem and game theory, applying them to contract law.

These theories reveal different ideas, and each of these ideas suggests some kind of change that can be made to account for these findings whether it be to limit issues within contracts or to maximize party benefits. The economic concepts are also used to highlight instances of market failure: when exchanges in the market promote inefficiency. The instances of market failure are dissected to reveal how they can be prevented through changes in the current law.

Additionally, the paper also explores two types of behavior: internalizer (selfless) and externalizer (self-interested) behavior. Since there are two distinct behavior types, different approaches affect different contractual behavioral tendencies. What might work for an externalizer may not work for an internalizer, and applying this idea suggests legal reforms as current laws are based upon externalizer actions. Thus, the suggested changes account for both internalizer and externalizer behavior, rather than just one. Ultimately, the paper highlights how basic economic principles and theories are used in the context of contract law and can be used to generate efficient outcomes. With the application of these concepts and reforms, this paper suggests how contracts can be improved to ensure both parties are better off.