Neoclassical Model Of Contract Analysis
INTRODUCTION
In daily life, we are bound to various types of contracts, such as contracts for employment, house loans, car loans and even marriage contract. Basically, a contract is an agreement entered by two or more parties, upon sufficient consideration, with the intention to perform or not to perform certain actions. A contract also can be simplified as a legally enforceable promise. For an example, Bank A gives a loan to a client, Mr Lim to buy a new house with the promise on the part of Mr Lim to pay back the loan at certain rate and certain period of time. The combination of the loan of the bank and Mr Lim’s promise to pay back the loan creates an enforceable contract. The enforceable contract gives right to the bank to bring an action
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According to it, the contract is a perfect instrument for exchange when the transaction costs are zero. It is where every contingency is anticipated; every risk is internalized; all relevant information is communicated; no gaps remain for courts to fill; no one needs the court protection from deceit and abuse; and nothing can go wrong. In the other hand, under the Neoclassical Model of Perfect Contracts, a perfect contract has the characteristics such as individual rationality, full information, no externalities, competitive markets, strict enforcement and zero transactions costs.
The characteristics of the perfect contract under the Coase Theorem seems like impossible in the real word as it is hardly to fulfil each one of the characteristics of the perfect contract under this model and as a result, the contract may fail. For example, in a sale of a house between the seller and the buyer, there is possibility that the seller may withhold certain necessary information which may affect the contract of the sale of house between the parties. From here, it can be said that the seller’s act of withholding the certain necessary information may cause the contract of the sale is
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