One-Sided Contracts in Competitive Consumer Markets
13 Pages Posted: 10 Nov 2005 Last revised: 29 Apr 2009
This paper shows that "one-sided" terms in standard contracts, which deny consumers a contractual benefit that seems efficient on average, may arise in competitive markets without informational problems (other than those of courts). A one-sided term might be an efficient response to situations in which courts cannot perfectly observe all the contingencies needed for an accurate implementation of a "balanced" contractual term when firms are more concerned about their reputation, and thus less inclined to behave opportunistically, than consumers are. We develop this explanation, discuss its positive and normative implications, and compare them to those of information-based explanations for one-sided terms.
Keywords: contracts, standard form contracts, contracts of adhesion, reputation, opportunism, observability
JEL Classification: D8, K12
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