The Parol Evidence Rule, Information Disclosure, and the Value of an Oral Promise

Abstract:     
The paper examines the role played by the parol evidence rule and integration when contracting parties are asymmetrically informed. The paper shows that by integrating an agreement, an uninformed party can better induce information disclosure from an informed party by penalizing non-disclosure and limiting the informed party's ex post opportunistic behavior. The paper also shows that when writing a complete contract is costly, the parties will rely on an oral promise backed by a sufficiently high liquidated damages in a partially integrated or unintegrated contract. This finding implies that the anti-penalty doctrine in contract law can either inefficiently force the parties to complete the contract or even undermine information disclosure.

Keywords: integration, parol evidence rule, incomplete contracts

JEL Classifications: D82, K12, K41, L14

Working Paper Series