NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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David Frydlinger

Cirio Law Firm
Cirio Advokatbyrå AB
Box 3294, 103 65
Stockholm
Sweden

E-Mail: David.Frydlinger@cirio.se
Institutional Affiliation: Cirio Law Firm

NBER Working Papers and Publications

September 2019Overcoming Contractual Incompleteness: The Role of Guiding Principles
with Oliver D. Hart: w26245
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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