Incomplete Contracts and the Theory of Contract Design
We are delighted to accept this invitation to write a short essay on the economic theory of incomplete contracts and to illuminate its current and potential impact on the legal analysis of contracts and contract law. Economic contract theory has made significant inroads in legal scholarship over the past fifteen years, and this is a good time to take stock of its strengths and weaknesses. Several recent publications in the Yale Law Journal have offered evaluations of the contributions of contract theory. In this essay, we offer our opinion as to its future path in legal scholarship. In particular, we suggest that economic contract theory should incorporate a more textured understanding of the process for judicial enforcement of contracts. In Part I, we describe briefly the economic theory of incomplete contracts and summarize its most important lessons for lawyers. In Part II, we highlight a limiting feature of economic contract theory: its stylized representation of legal enforcement in the concept of verifiability. We then outline an agenda for research that incorporates a more sophisticated understanding of litigation in the analysis of contract design. We describe briefly the initial steps we have taken in this direction in a forthcoming article.