Image via Wikipedia
Why do parties want their contracts to be enforced by courts? Without such enforcement, why would parties break their contracts and why would that be bad for the parties?
- Without enforcement, a party could appropriate funds that had been paid before contract performance (i.e., borrowers would be able to refuse to repay loans, insurers could keep premiums, etc.), rending the entire system unworkable.
- A party might not deliver a promised good or perform a promised service.If there is failure to perform even though performance would be best because its value exceeds its true cost, then the value of the contractual arrangement is diminished for the parties. This is avoided if contracts are enforced.
- Price cannot be fixed in advance, and parties can bargain opportunistically, changing prices later. This is price holdup and will result in underinvestment in the contractual enterprise.
Steven Shavell, Foundations of Economic Analysis of Law, pp. 297-299 (2004).