When Should Contracts be Assignable? An Economic Analysis
Jared G. Kramer
U.S. Court of Appeals for the 1st Circuit
Harvard Law and Economics Discussion Paper No. 484
This Article explores the economic logic of contracting parties' choice between making contract rights and obligations assignable and making them non-assignable. The analysis derives from the principle that parties will choose assignability, non-assignability, or something in between when that choice maximizes the joint value of the contract to the parties and therefore is mutually beneficial. The Article proceeds by discussing the reasons why in certain contexts restricting assignment may be more valuable to the parties than allowing it. Three of the reasons involve contexts where assignment can harm the non-assigning party by decreasing the value of a performance received or increasing the cost of an obligation owed. First, this may occur when one party's desired conduct is costly or impossible to specify by contract. Second, it may occur when the effectiveness of remedies against a promisor varies among potential promisors. Third, it may occur when one party bears another's non-conduct-related risk. Two other reasons are not concerned with the cost or value of performance - parties may restrict assignment to facilitate price discrimination, or to avoid assignment's administrative costs. The Article also discusses considerations that can make assignability particularly valuable - such as the ability to overcome holdout problems that could frustrate transactions; or long-term contracts where one party's valuation of the contract may change drastically over time. In discussing each consideration favoring or disfavoring assignability, this Article presents numerous examples of actual contracts, discussing whether these contracts restrict assignment, and why the parties would write them as they did. The result is a more comprehensive and nuanced explanation of actual practices in contract assignment than exists in the current literature.
Number of Pages in PDF File: 88
JEL Classification: K12, L14
Date posted: November 20, 2004