Contracts, Economics Of

Thierry Kirat & Frédéric Marty

The economic analysis of contract law is an important development in the law and economics movement. Applied to contracts, it analyzes the efficiency of various constitutive rules dealing with remedies, damages, penalty clauses, and default rules. The dominant method of law and economics consists of applying microeconomic principles to law and evaluating the economic consequences of legal rules. It analyzes notions of individual rationality, incentives, and individual responses to incentives contained in legal rules. Although the literature relating to contract law mainly concerns private law, it also treats governmental contracts, such as issues of procurement. Economic notions of contract have long been theoretical and formalist; the contract has been more an ancillary element in the study of market equilibrium than an object significant in its own right for the economy. For example, an Edgeworth diagram demonstrates the structure of the contract curve, from which the supply and demand for a ...

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