The Law and Economics of Contracts

Abstract

This paper, which will appear as a chapter in the forthcoming Handbook of Law and Economics (A.M. Polinsky & S. Shavell, eds.), surveys major issues arising in the economic analysis of contract law. It begins with an introductory discussion of scope and methodology, and then addresses four topic areas that correspond to the major doctrinal divisions of the law of contracts. These areas include freedom of contract (i.e., the scope of private power to create binding obligations), formation of contracts (both the procedural mechanics of exchange, and rules that govern pre-contractual behavior), contract interpretation (what consequences follow when agreements are ambiguous or incomplete), and enforcement of contractual obligations. For each of these sections, we address the economic analysis of particular legal rules and institutions, and, where relevant, connections between legal arrangements and associated topics in microeconomic theory, including welfare economics and the theory of contracts.

Keywords: contract law, freedom of contract, contract formation, pre-contractual liability, promissory estoppel, interpretation, incomplete contracts, default rules, form and substance, breach of contract, contract damages, private enforcement of contracts, contract theory

JEL Classification: D00, D8, K00, K12