Optimizing Contracting via Performance-Based Contracts
Optimizing Contracting via Performance-Based Contracts

Author(s): Elena-Luliana Gheorghe
Subject(s): Social Sciences
Published by: Udruženje ekonomista i menadžera Balkana
Keywords: Performance-Based Contracts; Contract architecture; Contract formation; Economic theory
Summary/Abstract: Economic theory regards the contract as a trading instrument that provides an optimal allocation of scarce resources (Posner, 1973). In this view, the economic utility of the contract is conferred by its binding force, and its binding force is justified by its ability to increase general welfare. Contract formation is an essential starting point in economic analysis. The need to conclude contracts with clear and well-defined terms is pressing. Primarily, a defective, incomplete contract, formulated in contradictory terms, is an invitation to default (Almășan, 2018). Secondly, as a result of non-execution, the contracts in question are referred to the courts, which have the difficult task - of ascertaining the real intent of the parties and giving it legal effect. The proliferation of problematic contracts has led to the undeniable reality that the courts are burdened with such disputes, which could easily have been avoided by better ex-ante consideration. In response to these inadequacies, Performance-Based Contracts have emerged. The development of performance-based contracts has been a collaborative and evolutionary process, influenced by academic research, economic theories, and the practical needs of organizations in various sectors. In light of the above, the article aims to analyze the advantages and disadvantages of performance-based contracting, the implications of the widespread use of this contracting method and its prospects.

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