| Abstract: |
Two parties sign a contract but before they fully perform they modify the
contract. Should courts enforce the modified agreement? The modification may
enable efficient trade in response to changed circumstances, or one party may
have made an efficient relationship-specific investment and then been held-up
by the other. Courts have had difficulty tackling this problem because the
facts required to discriminate between the two situations are non-verifiable.
A private remedy is for the parties to write a contract that is robust to
hold-up or that makes the facts relevant to modification verifiable. But
implementing such remedies requires commitment to the provisions, i.e., they
themselves are subject to non-compliance. Conventional contract technology,
e.g., the use of liquidated damages, to ensure commitment are disfavored by
courts and subject to renegotiation. Smart contracts written on blockchain
ledgers may offer a solution. We explain the basic economics of these
technologies. We argue that they can used to implement liquidated damages
without court involvement and thereby obtain commitment to renegotiation
design and revelation mechanisms. We address the hurdles courts may impose to
use of smart contracts and argue that sophisticated parties’ ex ante
commitment to them may lead courts to allow their use as pre-commitment
devices. |