A further reason motivating our decision to develop a theory of business contracts is that the building blocks for such a theory are only now becoming available. Contract theory has become one of the most significant fields in modern micro and industrial organization economics Three recent Nobel prizes, to George Akerloff, Michael Spence and Joseph Stiglitz, were awarded argely for work in contract theory, but the field itself is less than thirty years old. Moreover, much of the work in the field takes a mathematical form, and thus has not been easily accessible to nonspecialists. We draw heavily on contract theory to construct our normative theory of contracts. o Finally, as we suggested earlier, the current state of contract law scholarship suffers from the absence of a successful theory of contract. Thirty years ago, Grant Gilmore described what he called the classic willistonian model of contract law, a model grounded in formalist notions of the centrality of written agreements voluntarily exchanged between contracting parties, and that emphasized the limited role of the law in enforcing and interpreting these agreements According to Gilmore, this classical model owed more to Holmes imagination than to a careful reading of the case law. 2 But whether this was so or not, Gilmore believed that the modern case law repudiated the model. The disjunction between the dominant scholarly view and the lived 9The work of these scholars is concisely summarized in Karl-Gustaf Lofgren, Torsten Perssons and Jorgen Weibull, Markets with Asymmetric Information: The Contributions of George Akerlof, Michael Spence and Joseph Stiglitz, 104 Scan. J. Econ. 195(2002) Law and economics scholars such as Aaron Edlin, lan Ayres and Jason Johnston have used contract theory in illuminating fashion when discussing particular legal rules. See, e.g., lan Ayres robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L J 729(1989);Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615(1990). Aaron Edlin, Cadillac Contracts and Upfront Payments: Efficient Investment Under Expectation Damages, 12 J. L Econ. Org 98(1996). The genre of model that we and these scholars use has performed well in empirical tests. See P.A. Chiappori and B. Salanie, Testing Contract Theory: A Survey of some Recent Empirical Work, Working Pap #2002-11, Institut National De La Statistique Et Des Etudes Economiques(2002) IGRANT GILMORE, THE DEATH OF CONTRACT(1974) 12 The theory of contract, as formulated by Holmes and Williston, seems to have gone into its protracted period of breakdown almost from the moment of its birth"Id at 57. But see, Richard E. Speidel, An Essay on the Reported Death and Continued vitality of Contract, 27 Stan. L. Rev. 1161(1975)9 The work of these scholars is concisely summarized in Karl-Gustaf Lofgren, Torsten Perssons and Jorgen Weibull, Markets with Asymmetric Information: The Contributions of George Akerlof, Michael Spence and Joseph Stiglitz, 104 Scan. J. Econ. 195 (2002). 10Law and economics scholars such as Aaron Edlin, Ian Ayres and Jason Johnston have used contract theory in illuminating fashion when discussing particular legal rules. See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L. J. 729 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L. J. 615 (1990). Aaron Edlin, Cadillac Contracts and Upfront Payments: Efficient Investment Under Expectation Damages, 12 J. L. Econ. & Org. 98 (1996). The genre of model that we and these scholars use has performed well in empirical tests. See P. A. Chiappori and B. Salanie, Testing Contract Theory: A Survey of Some Recent Empirical Work, Working Paper #2002-11, Institut National De La Statistique Et Des Etudes Economiques (2002). 11GRANT GILMORE, THE DEATH OF CONTRACT (1974). 12“The theory of contract, as formulated by Holmes and Williston, seems to have gone into its protracted period of breakdown almost from the moment of its birth” Id. at 57. But see, Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 Stan. L. Rev. 1161 (1975). 9 A further reason motivating our decision to develop a theory of business contracts is that the building blocks for such a theory are only now becoming available. Contract theory has become one of the most significant fields in modern micro and industrial organization economics. Three recent Nobel prizes, to George Akerloff, Michael Spence and Joseph Stiglitz, were awarded largely for work in contract theory, but the field itself is less than thirty years old.9 Moreover, much of the work in the field takes a mathematical form, and thus has not been easily accessible to nonspecialists. We draw heavily on contract theory to construct our normative theory of contracts.10 Finally, as we suggested earlier, the current state of contract law scholarship suffers from the absence of a successful theory of contract. Thirty years ago, Grant Gilmore described what he called the classic Willistonian model of contract law, a model grounded in formalist notions of the centrality of written agreements voluntarily exchanged between contracting parties, and that emphasized the limited role of the law in enforcing and interpreting these agreements.11 According to Gilmore, this classical model owed more to Holmes’ imagination than to a careful reading of the case law.12 But whether this was so or not, Gilmore believed that the modern case law repudiated the model. The disjunction between the dominant scholarly view and the lived