Commentary: In Defense of the Contract at Will

Abstract

Professor Epstein's paper is very thoughtful and thought-provoking, and is squarely at the center of a great deal of recent economic research on contracts. This research has been one of the most fruitful outcomes of the interaction between law and economics. Someone has said that economists study the devices for and consequences of enforcing contracts, while lawyers specialize in finding imaginative ways in which contracts can be broken. Perhaps in this respect a contract at will is the best of all possible worlds, since it can in a sense be enforced and broken simultaneously. At a very abstract level, contracts at will differ from other types in that they do not specify a definite duration for the agreement. Rather the contract is open-ended and is broken when either side walks away and thereby terminates it. There are two main economic reasons why contracts at will are desirable. The more obvious arises when the gains from exchange that induce the contract are of uncertain duration and this uncertainty is common knowledge among the participants. This is what Epstein has in mind when he says that both parties know what they do not know.' In an employment contract, the worker may get a superior offer whose value exceeds that of the existing job. These offers tend to come in at random intervals. Similarly, the firm may suffer adverse fortunes that cannot be foreseen, except in terms of probabilities, at the time the exchange is initiated. An exchange is efficient if and only if the gains from the exchange to both parties exceed their opportunity costs (i.e., the gains forsaken in order to complete the exchange). The relationship should be ended when the total gains (to both parties) from continuing the relationship fall short of the total gains from termination. If the point in time at which the gains from the relationship will vanish is foreseeable, then a definite duration can be written into the contract; but when