Overcoming Contractual Incompleteness: The Role of Guiding Principles

38 Pages Posted: 9 Sep 2019

See all articles by David Frydlinger

David Frydlinger

Cirio Law Firm

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: September 2019

Abstract

We consider a buyer and seller who contract over a service. The contract encourages investment and provides a reference point for the transaction. In normal times the contract works well. But with some probability an abnormal state occurs and the service must be modified. The parties expect each other to behave “reasonably”, but given self-serving biases their views of reasonableness may not coincide, leading to aggrievement and deadweight losses. The adoption by the parties of guiding principles such as loyalty and equity in their contract can help. We provide supporting evidence in the form of case studies and interviews.

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Suggested Citation

Frydlinger, David and Hart, Oliver D., Overcoming Contractual Incompleteness: The Role of Guiding Principles (September 2019). NBER Working Paper No. w26245, Available at SSRN: https://ssrn.com/abstract=3450271

David Frydlinger (Contact Author)

Cirio Law Firm ( email )

Cirio Advokatbyrå AB
Box 3294, 103 65
Stockholm
Sweden

Oliver D. Hart

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-3461 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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