Complete Contracts in Finance

Authors

Elisabeth de Fontenay, Duke Law SchoolFollow

Document Type

Article

Publication Date

2020

Keywords

incomplete contracts, rules and standards, opportunism

Abstract

Notwithstanding its significant influence in corporate finance, the theory of incomplete contracts is arguably misunderstood by courts enforcing contracts governing corporate transactions. In resolving such disputes, judges implicitly assume that complete contracts are both achievable and desirable when the parties are financially sophisticated, and they systematically assign blame to one of the parties for leaving the contract incomplete. This, in turn, prompts parties to write ever longer and more complex agreements. Such agreements do not necessarily produce more efficient outcomes, however. In fact, they may yield unexpected outcomes or interpretations, which can be enforced opportunistically by one of the parties or by third parties.

Citation

Elisabeth de Fontenay, Complete Contracts in Finance, 2020 Wisconsin Law Review 533-552 (2020)