Flexibility in Long-Term Contractual Relationships: The Role of Co-Operation

A very substantial body of empirical and theoretical literature now exists' which purports to show that the explanation of long-term contracts by means of the classical law of contract is most problematic. The classical law, and its economic corollary in relatively unsophisticated formsof neo-classical economics, assume contractual promises to be the legal expression of the intentions of rational, utility-maximizing individuals making discrete exchanges in perfectly competitive markets. There is a strong implication bound up in this assumption that the parties to a contract would rapidly alter their allocative decisions should changed circumstances offer them the possibility of realizing profits in excess of those to be realised by performance of the existing contract.2 This implication is contradicted by the widely corroborated empirical finding in the case of long-term contracts that such shifts, even when of recognizable and quantifiable benefit to the potentially breaching party, typically are eschewed in order to realize what is assessed as the greater utility of the preservation of a long-term contract or wider longterm relationship. Indeed, short-term individual maximizing behaviour is rejected as opportunistic.3 At first glance, it would seem that very serious shortcomings of the classical law are exposed by these empirical findings, and we will argue that this is so.