ABSTRACT
Contracts lie at the heart of law and economics, as the exchange inherent in every such bargain represents the Coase Theorem in action. The Coase Theorem predicts that, in zero-transaction cost settings, parties will bargain to reallocate property interests to ensure optimal assignments. The theorem finds expression in the real world through contracts, which are thus an important field of study within law and economics. Contracts are presumptively efficient because the parties understand the terms of their arrangement. Ambiguity arises in contract because parties do not expressly account for an outcome. That failure typically occurs due to transaction costs. The law can efficiently impute terms that the parties could not cost-effectively have provided for in their agreement. The principal economic insight is to construe the agreement to maximise the joint surplus of the contract ex ante. That hypothetical construction attempts to recreate the outcome had the Coase Theorem applied.
