Why contracts are made

Profit Maximization - The Marginal Approach

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  1. Future provision of goods, especially for custom or specialized goods or services where a well-organized and routine market does not exist.
  2. Mutually beneficial reallocation or sharing of risks, including insurance contracts or partnerships for sharing of profits.
  3. Differences of opinion regarding future events. Thus each side “bets” on their outcome. Found especially in deals around securities and durable assets.
  4. Timing of consumption, i.e., borrowing or lending, which allows shifting the time a purchase is made.

Steven Shavell, Foundations of Economic Analysis of Law, pp. 296-97 (2004).

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