Mutually beneficial contracts are Pareto efficient

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A contract is mutually beneficial or Pareto efficient:

  • If it cannot be modified so as to raise the well-being (or “expected utility”) of each of the parties to it.

We expect contracts to tend toward this state, since we think that if a contract can be altered that would raise the expected utility of both parties, then that would be done.

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

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