3 Incomplete contract theory
This is the most recent theory that seeks an examination of the impact of institutional framework on the contract design. In the incomplete contract theory, agents are viewed as personnel who have savage rationality. Oliver Hart opines that incomplete contract theory works towards enriching the economic analysis of contractual transactions by providing stimulating highlights of the law and economics. This is because incomplete contract theory is able to provide an account for the effect of institutional framework on the economic contractual practices.
Based on the foregoing, incomplete contract theory creates a link between the capabilities of judicial institutions to provide an evaluation of the nature of contracts that are implementable and the efficiency.
Instead of having contract law and economics on two different platforms, it is important to have the same combined so as to formulate proper operational structures. There various factors which are behind this combination of contract law and economics.
3.1 Human Actors
Herbert Simon states that,”Nothing is more fundamental in setting our research agenda and informing our research methods than our view of the human beings whose behavior we are studying.” Human actors possess a transaction cost that is brought out by human actors’ cognitive ability and their ability to foresee. Intertwining of economics and contract has been made possible by the fact that the parties involved normally think ahead and take note of the hazards which might affect the contract. Human actors normally take measures to ensure mitigation of contractual hazards by putting in place operational structures.
3.2 Unit of analysis
The contractual transaction is deemed as the basic unit of analysis. The approach taken by human actors in unit of analysis is whereby they have to identify the main essentials of transactions that might lead to various hazards that will intrude on both economic movement and contract theory.
Having realized contractual transaction falls under the basic unit of analysis there is a greater want for harnessing it for economic reasons. This is where governance as a concept comes in. In this situation governance serves as a means through which order is attained with respect to conflicts that might arise in future thus threatening to undo any mutual gains achieved. It is at this point that contract law is fused with economics for purposes of transcending technology.
 Dye, R.A. “Costly Contract Contingencies”, (1985) International Economic Review, 26(1): 233–50
 Farnsworth, E.A. “On Trying to Keep One’s Promises: The Duty of Best Efforts in Contract Law”, (1984) University of Pittsburgh Law Review, 46: 1–20