Contextual Contracts: On a Context-sensitive Approach to Contract Theory

Abstract

I propose a method for introducing ‘context’ within the contractual environment based on a simple and intuitive application of control theory. The approach permits looking at several interesting practical features of contracts, be they incomplete, complete or smart, within a single framework. I define a contextual environment with the help of an interaction between three distinct spaces: a market-based contractual space framed within a formal institutional space and an even larger cultural space. Each space is characterized by a governing law built on a selection of control mechanisms that differ in their approach as well as their reliance on information generated from feedback mechanisms. I suggest how these governing laws tie the contextual spaces together and present some ideas on how they evolve through their interactions with other spaces. JEL: D20, D86, P50, Z10