It is through microeconomics that contract law in the United Kingdom gains recognition as an economic analysis object. This economic analysis is illuminated by the various avenues highlighted above. Economic analysis aids the microeconomic theory to be stretched to the extent of depicting the relationship between the various industries that make up the United Kingdom market economy. Microeconomics and contracts show the co-relation between partners, distributors and suppliers. Over a period of time, microeconomics in contracts has necessitated the need for redesigning of public policy especially regulation of services and matters dealing with competition.
Distribution agreements have been tailored with microeconomics to cover relationships that are loose between distributors and manufacturers. Such a co-relation leads to an installation of vertical restrictions. The rise of microeconomics in contract has portrayed contracts as co-ordination tools whose adaptability and flexibility permits them to be customized to the specific purpose of their use. Microeconomics approach of contract analysis focuses on the details relating to the management of the parties. The focus is relies on the transaction and not the market or industry.
The economics of employment and labor comprise of studying contractual relationships which also rely on the legal system and professional associations.
Having provided an in depth analysis of economic theory of contracts, it emerges that transaction cost theory is the most suitable theory that has an economic approach. The transaction cost theory depicts the efficiency of contracts in economics through various stages. Furthermore there is a contractual equilibrium notion which seeks to combine an individual incentive constraint and bargaining solution. Quite a number of the economic relationships which are contractual comprise of an agreement between the parties. The parties enter into negotiations and find a common ground where they agree on mutual interest matters. It is these interests which will formulate the basis of enforcement of their agreement.
The efficiency of contracts in economics was best highlighted by the development of frameworks which brought clarification between the externally and self-enforced elements of a contract. In getting the reasoning behind the efficiency discussed under this part, there is need for emphasis on the role of history, bargaining power and social convention which work towards the determination of contractual negotiation and renegotiation.
Based on the foregoing this paper humbly submits that economics and contracts have revolutionized the ease of conducting business in the market place.
Unlike the past where the issue of contracts was relegated to the back seats in economics, nowadays things have changed. Economist have stepped up and integrated contracts in the economic system since that is where the future lies. It is such dedication that has seen economists involved in the study of contracts and economics being recognized for shifting the markets. As a way of adding the economic understanding of contracts there is need for discovery of how certain contracts operate in practice. However in order to attain this, one needs a proper empirical analysis on the framework involved.
In particular, there is need to realize that the aim of contractual specification often is not to create optimal incentives on some imperfect court-enforceable proxy for performance. Rather than focusing solely on these direct incentive effects of contract terms now emphasized in the incomplete contracting literature, economic analysis of contract terms must also consider how contract terms may be used to facilitate self-enforcement. Contractual arrangements can be fully understood only by recognizing that trans-actors use court-enforced imperfect contract terms, including vertical integration, as a complement to their limited reputational capital in order to make a particular relationship self-enforcing over the broadest range of likely post-contract market conditions.
The discussion in this essay has long recognized that any business planning on entering an industry is free to choose its production arrangements from among a multitude of different input combinations and technical processes. Indeed, when multi-period operation is considered, and it is understood that the firm can adopt different forms of internal organization, use inputs of varying quality, follow any of diverse types of corporate culture, etc., the existing “state of the arts” implies the presence of a vast number of feasible production alternatives. The fact that enormous technological/organizational complexity characterizes real-world conditions is something that has to be faced by an adequate theory of the business.
At the same time, however, if it is accepted that the business’s operations are to be conducted in a neo-institutional environment in which transactions are costly and decision-makers are bounded rational, the orthodox idea that the business can move confidently and swiftly to an optimal configuration has to be abandoned. What seems evident is this basic truth: when a transition is made from the frictionless neoclassical world to the neo-institutional, the process by which decisions are reached on the organization must change profoundly.
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