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On the Design of Contracts and Remedies for Breach

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  • Steven Shavell

Abstract

The implications of uncertainty for the design of contracts and of remedies for their breach are studied. After characterizing complete contingent contracts, incomplete contracts are examined. Specifically, in view of difficulties in making contingent provisions (costs of enumeration and of bargaining; verification of occurrence of events), it is shown for which contingencies provisions are made. Then, in the major part of the paper, two important implicit substitute for contingent terms are analyzed. The first is provided by remedies for breach of contract; for when a party must pay damages for breach, he will be induced to fulfill his obligations in approximately those contingencies which would have been agreed upon under the terms of a detailed contract. The second substitute for contingent terms lies in the opportunity for renegotiation in light of circumstances, since renegotiation will occur in more or less those contingencies where the contract terms would have differed under a more detailed agreement.

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  • Steven Shavell, 1981. "On the Design of Contracts and Remedies for Breach," NBER Working Papers 0727, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0727
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    1. A. Mitchell Polinsky, 1981. "Risk Sharing through Breach of Contract Remedies," NBER Working Papers 0714, National Bureau of Economic Research, Inc.
    2. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
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