Why Contract Law Law and EconomicsCharles W Upton

Why Contract Law? Law and Economics-Charles W. Upton

The Edgeworth Box Apples Bananas Why Contract Law

The Edgeworth Box Apples Bananas Harry Why Contract Law Sally

The Edgeworth Box Sally a. H b. S a. S b. H Harry Why Contract Law

The Edgeworth Box Apples Sally Bananas Harry Why Contract Law

The Edgeworth Box Apples Sally Bananas Harry Why Contract Law

The Edgeworth Box Apples Sally B A Harry Why Contract Law Bananas C

The Edgeworth Box Apples Sally The Contract Curve A Harry Why Contract Law Bananas B

The Contract Curve Apples Sally Bananas Harry Why Contract Law

The Contract Curve Apples Harry Bananas Points in yellow area (the Core) make Harry and Sally better off. Sally Why Contract Law

The Contract Curve Apples Harry Bananas Points on black portion of contract curve are Pareto Optimum. Sally Why Contract Law

The Contract Curve Apples Harry Bananas Harry and Sally will move to the contract curve via voluntary exchange. Sally Why Contract Law

The Contract Curve Apples Bananas Harry and Sally will move to the contract curve via voluntary exchange. Here, they will end up along the black portion of the line Harry Sally Why Contract Law

Life is not that Simple • Harry is giving up Bananas; Sally is giving up Apples. Why Contract Law

Life is not that Simple • Harry is giving up Bananas; Sally is giving up Apples. • But Harry knows better than Sally whether the Bananas are good or rotten; conversely, Sally has superior knowledge of the quality of her Apples. Why Contract Law

Life is not that Simple • Harry is giving up Bananas; Sally is giving up Apples. • But Harry knows better than Sally whether the Bananas are good or rotten; conversely, Sally has superior knowledge of the quality of her Apples. • A Barrier to trade: knowledge. Why Contract Law

A Game Theory Approach • I am thinking of hiring you to do some work. Why Contract Law

A Game Theory Approach • I am thinking of hiring you to do some work. – I get $60 of benefit – You give up $40 of leisure – We agree on $50. Why Contract Law

A Game Theory Approach • I am thinking of hiring you to do some work. – I get $60 of benefit – You give up $40 of leisure – We agree on $50. • However the agreement is not enforceable. Why Contract Law

A Game Theory Approach • I am thinking of hiring you to do some work. • However the agreement is not enforceable. • Should you show up and do the work? Why Contract Law

The Payoff Strategy Employee Work Don’t Work Employer Pay Employer Don’t Pay Why Contract Law Don’t Pay

The Payoff Strategy Employee = 50 – 40 = 10 Work Employer. Don’t = 60 -50 = 10 Employer Pay Employer Don’t Pay (10, 10) Why Contract Law Don’t Pay

The Payoff Strategy Employee = 0 – 40 = -40 Work Employer. Don’t = 60 -0 Work = 60 Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Why Contract Law Don’t Pay

The Payoff Strategy Employee = 50 – 0 = 50 Work Employer = 0 -50 = -50 Don’t Work Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Pay Don’t Pay (50, -50) Why Contract Law

The Payoff Strategy Employee = 0 – 0 = 0 Work Employer = 0 -0 = 0 Don’t Work Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Pay Don’t Pay (50, -50) Why Contract Law (0, 0)

The Payoff Strategy Employee Work Don’t Work Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Pay Don’t Pay (50, -50) Why Contract Law (0, 0)

The Payoff Strategy Employee Work Don’t Work Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Pay Don’t Pay (50, -50) Why Contract Law (0, 0)

The Payoff Strategy Employee Work Choice Question: Don’t Work A Multiple Which is Better? Employer (a)Working for a disutility of -$40 Pay and not getting Pay Don’t Pay paid? (b)Not working and not getting (50, -50) (0, 0) (10, 10)paid? (-40, 60) Why Contract Law

The Payoff Strategy Employee Work Don’t Work Employer Pay (10, 10) Employer Don’t Pay (-40, 60) Pay Don’t Pay (50, -50) Why Contract Law (0, 0)

Some Extensions • If I pay you in advance, we have the same issue Why Contract Law

Some Extensions • If I pay you in advance, we have the same issue • Without a legal system, we would pass up many valuable opportunities for contracts and exchange of goods and services. Why Contract Law

First Principle of Contract Law • Convert Non-Cooperative Games to Cooperative Games. Why Contract Law

End © 2004 Charles W. Upton Why Contract Law