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Overcoming contractual incompleteness: the role of guiding principles

Author

Listed:
  • David Frydlinger
  • Oliver Hart

Abstract

Transactions of any complexity between buyers and sellers are supported by long-term contracts and these contracts are inevitably incomplete. We propose an approach for overcoming contractual incompleteness based on the idea that most people are inclined to follow widely accepted social norms, such as being fair-minded and acting with integrity. We suggest that this tendency can be reinforced if these social norms are incorporated into a formal contract in the form of guiding principles. We develop a model in which guiding principles reduce shading behavior and discuss cases where the approach has been successfully applied in practice (JEL D23, D86, K12).

Suggested Citation

  • David Frydlinger & Oliver Hart, 2024. "Overcoming contractual incompleteness: the role of guiding principles," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 40(3), pages 625-647.
    • Handle: RePEc:oup:jleorg:v:40:y:2024:i:3:p:625-647.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewac027
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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