The Economics of Relational Contracts

MacLeod, W. Bentley

The legal scholarship on relational contracts highlights the fact that commercial transactions rely upon a large number of institutions, including trade norms and the good reputation of industry participants. This complexity is in contrast to the simple models that are often used in economics analysis of the law, leading Macauley (2002) to suggest one can view “law and economics as a desert, and law and society as a swamp". The purpose of this paper is to show that the economic analysis of relational contracts touches upon several elements of modern micro-economics that can be distinguished by different meanings of the term “price” . The term “economic price” refers to the true resource cost of a commodity, and can explain the role of standards setting by trade organizations. “Trade price” refers to terms of trade, but can be distorted due to asymmetric information. This effect may be mitigate via reputational mechanisms. Finally, “contract price” refers to contingent prices such as warranties, as well as legally enforceable agreements for which courts can be asked to impose damages where there is con- tract breach.



More About This Work

Academic Units
Department of Economics, Columbia University
Department of Economics Discussion Papers, 1314-23
Published Here
November 17, 2014