Overcoming Contractual Incompleteness: The Role of Guiding Principles
We consider a buyer and seller who contract over a service. The contract encourages investment and provides a reference point for the transaction. In normal times the contract works well. But with some probability an abnormal state occurs and the service must be modified. The parties expect each other to behave “reasonably”, but given self-serving biases their views of reasonableness may not coincide, leading to aggrievement and deadweight losses. The adoption by the parties of guiding principles such as loyalty and equity in their contract can help. We provide supporting evidence in the form of case studies and interviews.
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Copy CitationDavid Frydlinger and Oliver D. Hart, "Overcoming Contractual Incompleteness: The Role of Guiding Principles," NBER Working Paper 26245 (2019), https://doi.org/10.3386/w26245.Download Citation
Published Versions
David Frydlinger & Oliver Hart, 2024. "Overcoming contractual incompleteness: the role of guiding principles," The Journal of Law, Economics, and Organization, vol 40(3), pages 625-647.
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