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Incomplete Contracts In A Complete Contract World, Scott A. Baker, Kimberly D. Krawiec Apr 2006

Incomplete Contracts In A Complete Contract World, Scott A. Baker, Kimberly D. Krawiec

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This paper considers the role that contract doctrine should play in facilitating optimal investment in contractual relationships. All contracts are incomplete in the sense that they do not specify the optimal actions for the buyer and seller in every future contingency. This incompleteness can lead to both under and over-investment in resources specifically targeted to the needs of the other contracting party. To solve these investment problems, economists and legal scholars have looked to complicated contractual solutions and the ownership of assets.

This Article offers another solution: contract doctrine. Specifically, we propose a contractual default rule applicable to all contract …