Mutually beneficial contracts and Pareto efficiency

Cover of "Foundations of Economic Analysi...Cover of Foundations of Economic Analysis of Law

In the language of economics, a contract is Pareto efficient, and mutually beneficial, if it cannot be modified so as to raise the well being (or the expected utility) of each of the parties to it. If such a modification could be done to improve the contract for both parties, we would rationally expect this to be done.

Steven Shavell, Foundations of Economic Analysis of Law, pp. 293 (2004).

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