A brief survey on law and economics of contract law

• Author: Yusuf Sertaç Serter
• Pages: 126-136

A brief survey on law and economics of contract law1

Assistant professor Yusuf Sertaç SERTER2

Abstract

Right to own property and freedom of contract are two fundamental rights for the

good of society. That’s to say – together with property law – contract law is vital for a good

functioning economy. Thus, contract is a solid instrument to increase social welfare.

Accordingly, a brief descriptio n of economic analysis of contract law will be carried out in

this essay. As such, the author of the essay attempts to find appropriate answers to certain

major questions including the following: Why are contracts good from a societal point of

view? What types of risks can arise in a contract? What is a fully specified contract and

how will risks be alloca ted in a fully specified contract? Why is a particular risk allocation

in contracts important for both society and contracting parties? What are the consequences

of transaction costs for contract law? What is the economic purpose o f codification of

default rules?

Keynotes: law and ec onomics of contract law, fully specified contra ct, risk

allocation, default rules

JEL Classification: K12

1. Introduction

From an economic point of view, right to own property and freedom of

contract are two fundamental rights for the good of society. That’s to say - together

with property law - contract law is vital for a good functioning economy. It can be

alleged that there are two explanations for such statement, based on two different

approaches: Pursuant to the philosophical approach, freedom of contract

guaranteed under contract law is based on private autonomy. As such, contract is

the legal expression of the idea stating that people, as private autonomies, have

certain rights with regard to their own wishes and contract provides people with an

instrument to express of their own free will. On the other hand, the economic

approach justifies the aforementioned statement in a totally different way since

1 This essay was originally submitted to Professor Dr. Hans-Bernd Schäfer on November 2013 as the

mid-term paper for the course named “Economic Analysis of Law” taken within the scope of the

LL.M. programme in “Law & Economics” at Bilkent Graduate School o f Economics and Social

Sciences, and awarded grade A (i.e. 99 / 100). The author wishes to express sincere appreciation and

gratitude to Professor Schäfer for his valuable guidance in the preparation of this essay. As always,

all mistakes are my own.

2 Yusuf Sertaç Serter – School of Law, Anadolu University, Turkey, ysserter@anadolu.edu.tr