Trustworthiness and Contract
MORAL MARKETS: THE CRITICAL ROLE OF VALUES IN THE ECONOMY, Paul J. Zak, ed., Princeton University Press, 2007
29 Pages Posted: 13 Sep 2006
When we contract, we prefer partners we think will be trustworthy. Without a reliable mechanism for contract enforcement, people are tempted to contract only with those they know or through known intermediaries. Larger efficiency gains can be achieved, however, if people are willing to contract with strangers. Contract law helps to enhance the extent to which strangers are willing to contract with one another. This chapter describes how flexible contract doctrine coupled with carefully developed mandatory law rules work together to enable contracting parties to trust that the other will perform her promises in a trustworthy fashion. It also describes the role of contract damages rules in promoting both trust and trustworthiness. Finally, it is not optimal for courts to fully compensate the injured party in the event of breach. If the goal of contract law is to enhance trustworthiness in exchange, then a default rule that awards substantial but incomplete damages for breach of promise is optimal. However, parties should be permitted to opt for different damages so long as their damage clauses are not punitive.
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