Contract Law From Law And Economics Perspective

1581 WordsMay 9, 20167 Pages
b. Contract Law from Law and Economics Perspective Voluntary exchange is of the utmost importance in being able to transfer resources from less to more valuable uses and to the hands of those that value them the most. This process of exchange does not face many obstacles when the parties to a transaction can perform their obligations in a simultaneous manner. In today’s world, most transfers of resources occur through contracts and require agreements as to how, where, and at what price the transfer will occur at some time in the future. This is why protection of contract rights is essential. While voluntary exchange would not necessarily break down entirely without any form of contract law, it would be highly inefficient. In a legal…show more content…
If efficiency is not enforced through contract law it will bias investment toward economic activity that can only be conducted in a short time period. This will reduce efficiency in the market and lead to misallocation of resources. Here is a simple example of how the lack of contract law’s existence would affect how parties interacted in the sale of goods and services. Professor Chrisman has advertised that he has a hog (not to be confused with a pig), worth $100 to him, for sale and now has two potential purchasers. Buyer one, Professor Todd, has offered to purchase the hog today from $150 (he is risk adverse and believes that price of pigs is going to increase drastically over the next year). Buyer two, Professor Hesch, has offered to purchase the hog next Saturday at graduation for $200. If Professor Chrisman lives in a system without contract law he will accept Professor Todd’s offer of $150 today because he will be worried that Professor Hesch will change his mind before graduation and Professor Todd will have bought another hog. The law’s failure to enforce contract law has caused an inefficient misallocation of resources because Professor Chrisman cannot enforce the promise made by Professor Hesch and will not be incentivized to take the risk of selling the hog to him. The single purpose and goal of all contract law is to impose contract liability only where it creates incentives to encourage value maximizing conduct in the future.
Open Document