Flexibility in Long-Term Contractual Relationships: The Role of Co-Operation.

A very substantial body of empirical and theoretical literature now exists which purports to show that the explanation of long-term contracts by means of the classical law of contract is most problematic. The classical law, and its economic corollary in relatively unsophisticated forms of neo-classical economics, assume contractual promises to be the legal expression of the intentions of rational, utility maximising individuals making discrete exchanges in perfectly competitive markets. There is a strong implication bound up in this assumption that the parties to a contract rapidly would alter their allocative decisions should changed circumstances offer them the possibility of realising profits in excess of those to be realised by performance of the existing contract. One form of this idea is the notion of the efficient breach. The rejection of the possibility of coming to any general conclusion about the efficiency of breach because of the impossibility of quantifying such a breach’s full costs to the non-breaching party is one example of the type of rejection of individual utility maximizing behavior as a tenable explanation of contractual relations that we will pursue in general here (Harris 1982, Macneill 1982, Macneil 1988).