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

Why Contract Law The Edgeworth Box Apples Bananas

Why Contract Law The Edgeworth Box Apples Bananas Harry Sally

Why Contract Law The Edgeworth Box Harry Sally aHaH aSaS bHbH bSbS

Why Contract Law The Edgeworth Box Harry Sally Apples Bananas

Why Contract Law The Edgeworth Box Harry Sally Apples Bananas

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

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

Why Contract Law The Contract Curve Harry Sally Apples Bananas

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

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

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

Why Contract Law The Contract Curve Harry Sally 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

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 Employer Don’t WorkWork Pay Don’t Pay

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

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

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

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

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

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

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

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

Why Contract Law 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