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Simplicity and Complexity in Contracts

University of Chicago Law School, John M. Olin Program in Law and Economics Working Paper No. 93

46 Pages Posted: 19 Jan 2000  

Karen Eggleston

Stanford University - Shorenstein Asia-Pacific Research Center

Eric A. Posner

University of Chicago - Law School

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: January 18, 2000

Abstract

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 of payoffs contracted to flow between parties; and (3) severe in the cognitive load necessary to understand the contract. Yet most real-world contracts are simple along all three of these dimensions. We argue that many factors, often neglected in the literature, account for this discrepancy. The factors are categorized as asymmetric information, monitoring dynamics, evolutionary pressures, conventions, reliance on trust and reputation, enforcement costs, bounded rationality, and renegotiation. This positive analysis has normative implications for how lawyers draft contracts, and for how courts rely on the form of a contract (specifically, its degree of complexity) in order to interpret it.

JEL Classification: K12

Suggested Citation

Eggleston, Karen and Posner, Eric A. and Zeckhauser, Richard J., Simplicity and Complexity in Contracts (January 18, 2000). University of Chicago Law School, John M. Olin Program in Law and Economics Working Paper No. 93. Available at SSRN: https://ssrn.com/abstract=205391 or http://dx.doi.org/10.2139/ssrn.205391

Karen Eggleston

Stanford University - Shorenstein Asia-Pacific Research Center ( email )

Stanford, CA 94305
United States

Eric A. Posner (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

Richard J. Zeckhauser

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

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