Chapter 5: Contract theory and the economics of contract law
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In economics, contract theory deals with questions of how economic actors – as maximizers of their own utility – behave in certain contractual arrangements, and the implications of such behavior in terms of efficiency. Put differently and in more normative terms, contract economics is interested in constructing efficient contract designs given the incentives of the parties. Due to imperfect information and other causes, the parties are sometimes not able to reach the optimal solution, that is, the contract maximizing their joint utility, on their own. Then the question arises whether contract law can help to mitigate the ensuing welfare loss.