5 - Digression on simplified pictures. o A. In thinking...

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Digression on simplified pictures. o A. In thinking through the logic of a problem, whether in physics, mathematics, or economics, we frequently use simplified pictures, designed to bring out the particular issue we are interested in. o B. For example, we worth out the logic of Newtonian motion by analyzing the trajectory of canonballs in a vacuum--without worrying about the fact that in a vacuum, the canoneers would die before they could fire their cannons. o C. Similarly, much of what we are doing in this course involves deliberately simplified pictures, intended to let us think through the logic of one problem or another. o D. After doing so, one is better equipped to deal with the much messier conditions of real life problems. I. Contract law: Why have it? o A. Why do we want contracts to be enforceable? 1. Because performance often occurs over time, with transaction specific investments. 2. House building problem, for example. o B. What about private enforcement? 1. Via reputation: Orthodox jews in the diamond industry example. a. The industry depends heavily on trust, keeping your contract, etc. b. But orthodox Jews are not permitted to sue each other. c. If you violate the agreement, there are mechanisms (take it to the Rabbi) for proving the fact, and then publicizing it. d. And presumably, if you don't have enough of a stake in your reputation yet for that to matter, you won't be trusted the deals where you could make a lot of money by breaking your contract. e. Also, there are social costs as well as economic ones with such a tight-knit community f. Perhaps patterns like this--of small, close knit ethnic minorities dominating some industry, are evidence that this is a better method of enforcing contracts. g. But people who are not members of such groups, not engaged in repeat dealings in markets where reputation is important, still want to sign contracts--building a house. 2. Via bonding with a reputable enforcer a. This requires you to have enough assets to post bond b. But legal enforcement requires you to have enough assets to pay damages
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c. The difference is that you don't have to actually transfer them to a bond agency. 3. So there may be a legitimate role for government enforcement a. And whether legitimate or not it is there and worth studying b. Many of the economic issues are the same whether we are talking about public courts or private arbitrators. c. It is worth remembering the latter case, since it represents a large fraction of all commercial dispute settlement, but insn't usually included in what law students study. o C. Why do you need contract law --why not just enforce the contract, letting the parties define all the rules? 1. Because you don't think they should be permitted to define the rules--
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This note was uploaded on 04/05/2012 for the course ECON 395 taught by Professor Beckett during the Fall '11 term at Rutgers.

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5 - Digression on simplified pictures. o A. In thinking...

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