On the Optimal Number of Contract Types

Abstract

The theoretical availability of an infinite number of contract types suggests that there may be an optimal quantity from which contractual parties could make a selection. In this Article, we emphasize the difficulty of identifying that optimal number, given information costs and other transaction costs related to the production of a contract type. We argue that standard market failures might cause markets to produce a suboptimal number of contract types. We then consider whether government should intervene to remedy any market failure. We conclude that government would generally lack the access to information necessary to identify the optimal number of contract types. Moreover, we argue that issues of political economy would impede the ability of government to achieve the optimal number of contract types, even if it were able to identify that number. Government, that is, may tend to either oversupply or undersupply contract types. Perhaps the best that government can do is to provide “soft” interventions that reflect appropriate defaults or safe harbors.