Contracting in modern world
I) firstly there is manifest non-performance. Thus, for example, if the contract’s legal effectiveness is not adequate to intimidate anyone intending not to perform, it may be worthwhile for one party to avoid calling for the other to perform second, and thus to construct the contract so that the services are performed simultaneously;
II) secondly there is opportunistic strategic behavior associated with court costs.
If in fact a court system applies some costs to the winning party as well, then an unfair contracting party might adopt a strategy of threatening a legal challenge even in the event he is wrong. This could happen because it is possible that the likely winner will fear the court dispute more than the party likely to lose. This situation may be even more likely to obtain when the results of the dispute are uncertain. In a situation of this type, efficient clauses that might permit strategic court behaviors are avoided;
III) thirdly there is opportunistic behavior consisting of exploitation of asymmetric information that enables a party to carry out actions that the other party cannot know about. In fact, this opportunistic behavior falls into the category of moral hazard.
So in this case of opportunistic behaviours there is no incentive for maximizing the joint return.
However, when such impediments are not present, interest in maximizing the joint earning is present, and efficient clauses can be sought through negotiations.
But in addition to being intended for the purpose indicated, the activity of negotiating, consisting of a search for an opportunity for exchange and for exploitation of the efficient clauses, also serves another purpose. This purpose is represented by division of the contractual surplus. For simplicity’s sake, let us assume an exchange consisting of a purchase and sale. Let us imagine that X, the buyer, values the property $100, whereas Y, the seller, values it $50. Let us also assume that there is a guaranty clause that X values at $10 while for Y it involves a cost of $5. Let us also assume that Y is obligated to provide transport for the property and that this service is valued by X at $30, whereas it costs Y $10. Now, in a situation of this type, the contractual surplus is equal to: $100 – $50 + $10 – $5 + $30 – $10, or $75. One of the purposes at which the negotiation is aimed consists of establishing a division of the contractual surplus, which in the example considered is represented by earnings of $75.
Having thus identified the two main purposes pursued through negotiation, we can now turn to a study of the motives that seem to push individuals and companies to give up this activity. But before attempting to provide an answer to this problem, a further preliminary examination would seem necessary, an examination regarding the structural characteristics of the activity of negotiation, especially in order to determine what type of costs it carries for those involved.
Negotiating activity, as traditionally practiced, requires the commitment of both parties. In the event of an exchange between entrepreneur and consumer, negotiation requires an activity on both their parts. Their activities are characterized by being labor-intensive for both, i.e., they basically require work as their cost. If we did not wish to consider the client’s activity as work, it would be more correct to use the term time-intensive rather than labor-intensive[5]. In other words, negotiation basically requires that the entrepreneur use the work factor, whereas it mainly requires a commitment of time from the consumer.
These activities are also both characterized by their not having enjoyed – to date – the advantages associated with technological innovation[6].
These two aspects lead us to conclude that the cost of negotiations has risen considerably in the last few decades, in tandem with the increase in the cost of the labour factor and the opportunity cost of time.
Examined in light of what we said regarding the purposes typically pursued through contracting, this conclusion leads us to two considerations:
the first is that the activity aimed at division of the contractual surplus is destined to decline. Indeed, with the increase in the cost of laboor and of the opportunity cost of time, the costs of negotiation aimed at dividing the surplus also increase, without the possible earnings from such activity increasing proportionately. If, for example, it is possible to achieve a contractual surplus of $100 after one hour of negotiation, whether it is worthwhile to undertake the negotiation depends on whether the cost of the labor factor is $10 per hour or $200 per hour, and, likewise, on whether the opportunity cost of time is $10 or $200 per hour;
the second is that this increase in costs relating to negotiation may also carry with it a reduction in negotiation at all, including with regard to the search for efficient clauses.
But it is not only the increase in the cost of negotiation that influenced the decline in this activity. There is also a worsening of relative costs required to manage personalized contracts, which has made them less economical. Only in recent years has the activity of managing personalized contracts begun to enjoy some form of lowering of costs associated with innovations in the IT field. Prior to the changes that occurred with introduction of the electronic processor, the activity of managing personalized contracts also seemed “stagnant,”[7] and hence its cost, relative to all “progressive” activities, underwent major increases.
Note
5. The expression “time intensive” was coined by G. Becker, A Theory of Allocation of Time, 75 Econ. J. 493 (1965).↑
6. In 1967 economist W. Baumol, Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis, 57 Amer. Econ. Rev. 415 (1967), made a distinction between productive activities that have experienced increased productivity because of technological innovations and the accumulation of capital and productive activities that have not experienced such increased productivity. He used the expression “technologically progressive activities” to indicate the former and “nonprogessive activities” to indicate the latter. Bawmol shows that this difference between progressive and nonprogressive activities involves a constant increase in the relative costs of the goods produced through nonprogressive activities as opposed to goods produced by means of progressive activities. As the cost of goods produced by nonprogressive activities thus rise, it is possible that their production will tend to diminish to the point of disappearing. Bawmol theorizes that this may be the fate of theatrical performances, for example, of extremely luxurious homes, of made-to-order clothing and of hand- decorated ceramics. However, for those goods for which demand is increasing as individual incomes increase, this end does not seem predetermined.↑
