Firms that maximize profits face the canonical"contracting problem"of ensuring both efficient ex post trade and efficient ex ante investment in the subject matter of the contract Parties trade efficiently when, and only when, the value of the exchanged performance to the buyer exceeds the cost of performance to the seller. Parties invest efficiently when their actions maximize a deals expected surplus. Many observers would agree that contract law should attempt to facilitate efficient trade and investment. The novelty of our theory lies in its systematic development of the implications of this goal and in its claim that contract law should restrict itself to the pursuit of efficiency alone(for Category I contracts Four objections may be made to the claim that contract law should restrict itself to encouraging efficient trade and investment. First, one can argue that firms sometimes do not maximize profits and, owing to the systematic cognitive errors made by the people who run them, are incapable of doing so should they try. Thus, a law that presupposes profit maximization will be misguided. Second, firms that maximize profits sometimes do bad things- pollute the environment, for example -- that the law should attempt to deter. Third, the state should promote fairness in contracting in addition to efficiency. And, finally, the state should pursue distributional goals although they sometimes conflict with efficiency These objections should trouble a unitary efficiency approach to the regulation of all contract types, but we will argue that the objections have little force when Category I contracts alone are considered. Thus we will argue. firms and markets are structured so as to minimize the likelihood of systematic cognitive error by important decisionmakers within the firm. Cognitive error, that is, is more likely to afflict Category 2 and 3 contracts than Category 1 contracts Further, the bad things that firms do commonly entail imposing costs on third parties, such as creating environmental harms or erecting barriers to entry. These behaviors-the creation of negative externalities-are regulated by the environmental and antitrust laws. A contract law as such therefore can assume the absence of externalities. Finally, it usually is futile Legal scholars commonly refer to investment in the contracts subject matter as "reliance". We use reliance and the economists term"investment" interchangeably4 Legal scholars commonly refer to investment in the contract’s subject matter as “reliance”. We use reliance and the economist’s term “investment” interchangeably. 5 Firms that maximize profits face the canonical “contracting problem” of ensuring both efficient ex post trade and efficient ex ante investment in the subject matter of the contract.4 Parties trade efficiently when, and only when, the value of the exchanged performance to the buyer exceeds the cost of performance to the seller. Parties invest efficiently when their actions maximize a deal’s expected surplus. Many observers would agree that contract law should attempt to facilitate efficient trade and investment. The novelty of our theory lies in its systematic development of the implications of this goal and in its claim that contract law should restrict itself to the pursuit of efficiency alone (for Category 1 contracts). Four objections may be made to the claim that contract law should restrict itself to encouraging efficient trade and investment. First, one can argue that firms sometimes do not maximize profits and, owing to the systematic cognitive errors made by the people who run them, are incapable of doing so should they try. Thus, a law that presupposes profit maximization will be misguided. Second, firms that maximize profits sometimes do bad things – pollute the environment , for example -- that the law should attempt to deter. Third, the state should promote fairness in contracting in addition to efficiency. And, finally, the state should pursue distributional goals although they sometimes conflict with efficiency. These objections should trouble a unitary efficiency approach to the regulation of all contract types, but we will argue that the objections have little force when Category 1 contracts alone are considered. Thus, we will argue, firms and markets are structured so as to minimize the likelihood of systematic cognitive error by important decisionmakers within the firm. Cognitive error, that is, is more likely to afflict Category 2 and 3 contracts than Category 1 contracts. Further, the bad things that firms do commonly entail imposing costs on third parties, such as creating environmental harms or erecting barriers to entry. These behaviors – the creation of negative externalities – are regulated by the environmental and antitrust laws. An analysis of contract law as such therefore can assume the absence of externalities. Finally, it usually is futile