pursue contractual fairness when firms are permitted a large measure of contractual freede This is because firms will contract away from fair legal rules that do not maximize joint surplu In sum, efficiency is the only institutionally feasible and normatively attractive goal for a contract law that regulates deals between firms .S An efficiency theory restricted to contracts between firms(as firms are defined above)has four major implications for contract law. To understand the first implication, realize that contracts often would be performed even if there were no legal sanction for breach. These contracts are"self-enforcing"in two senses. First, when parties contemplate making a series of contracts, neither party would breach an early contract if the gains from one breach are lower than the expected profit stream from future contracts that breach would cause to vanish. Second neither party will breach if the gains are exceeded by the reputational sanction the market will exact. When contracts fall outside the self-enforcing range, legal enforcement is necessary to erformance in two principal cases: in volatile markets, when a partys failure to perform could threaten its contract partners survival; and when contractual surplus would be maximized if one or both parties made relation-specific investments. Enforcement"includes more than simply requiring parties to perform, however. The enforcement function comprises policing contracts for fraud and duress, and the congeries of rules that encourage or facilitate performance such as the damage rules. Perhaps a third of the sections in UCC Article 2 are enforcement rules under the definition here. The initial implication of our theory is that enforcement, when needed, is much the most important thing the state does. Put more starkly, a modern commercial economy As another example of the criticism that we sidestep here, Professor Melvin Eisenberg has criticized theories holding that contract law should maximize welfare alone on the ground that"these theories are impoverished. because they exclude other important policy values, such as the value of keeping intimate and affective relationships free from the intrusion of state power". Melvin A. Eisenberg, The Theory of Contracts, in THE THEORY OF CONTRACT LAW: NEW ESSAYS 206, 238( Peter Benson, Ed 2000). This objection may have force as applied to Category 2 contracts, between persons, but seems irrelevant to the Category I contracts we analyze. Thus, contracts between General Electric and General Motors seem not to involve"intimate and affective A relation-specific investment is not fully"redeployable". As an example, assume that a seller purchases standard steel tubes to make a machine for the buyer. The seller's investment would be"general"if breach occurred before the seller began work on the tubes because the tubes could be resold on the market. The investment would become"relation specific"if breach occurred after the tubes had been fabricated into shapes that only the buy could use, for then the transmuted tubes could only be resold as scrap, probably for less than their cost 65 As another example of the criticism that we sidestep here, Professor Melvin Eisenberg has criticized theories holding that contract law should maximize welfare alone on the ground that “these theories are impoverished ... because they exclude other important policy values, such as the value of keeping intimate and affective relationships free from the intrusion of state power”. Melvin A. Eisenberg,The Theory of Contracts, in THE THEORY OF CONTRACT LAW: NEW ESSAYS 206, 238 (Peter Benson, Ed. 2000). This objection may have force as applied to Category 2 contracts, between persons, but seems irrelevant to the Category 1 contracts we analyze. Thus, contracts between General Electric and General Motors seem not to involve “intimate and affective relationships.” 6 A relation-specific investment is not fully “redeployable”. As an example, assume that a seller purchases standard steel tubes to make a machine for the buyer. The seller’s investment would be “general” if breach occurred before the seller began work on the tubes because the tubes could be resold on the market. The investment would become “relation specific” if breach occurred after the tubes had been fabricated into shapes that only the buyer could use; for then the transmuted tubes could only be resold as scrap, probably for less than their cost. 6 to pursue contractual fairness when firms are permitted a large measure of contractual freedom. This is because firms will contract away from fair legal rules that do not maximize joint surplus. In sum, efficiency is the only institutionally feasible and normatively attractive goal for a contract law that regulates deals between firms.5 An efficiency theory restricted to contracts between firms (as firms are defined above) has four major implications for contract law. To understand the first implication, realize that contracts often would be performed even if there were no legal sanction for breach. These contracts are “self-enforcing” in two senses. First, when parties contemplate making a series of contracts, neither party would breach an early contract if the gains from one breach are lower than the expected profit stream from future contracts that breach would cause to vanish. Second, neither party will breach if the gains are exceeded by the reputational sanction the market will exact. When contracts fall outside the self-enforcing range, legal enforcement is necessary to ensure performance in two principal cases: in volatile markets, when a party’s failure to perform could threaten its contract partner’s survival; and when contractual surplus would be maximized if one or both parties made relation-specific investments.6 “Enforcement” includes more than simply requiring parties to perform, however. The enforcement function comprises policing contracts for fraud and duress, and the congeries of rules that encourage or facilitate performance, such as the damage rules. Perhaps a third of the sections in UCC Article 2 are enforcement rules under the definition here. The initial implication of our theory is that enforcement, when needed, is much the most important thing the state does. Put more starkly, a modern commercial economy