Money-only executory contracts make efficient breach impossible and full performance always efficient.

Evidence

The use of reputation bonds to enforce contracts is sometimes said to be inefficient because there is no correlation between the damage suffered by the promisee and the cost of breach to the promisor. Because the cost of breach to the promisor is generally assumed to be large, reputation bonds are said to induce an inefficiently high level of contractual performance. The most common type of executory agreement in the diamond industry, however, is exchange of goods today for a promise to pay X dollars on a future date. Consequently, the most common type of breach is nonpayment. On the day payment is due and the buyer has to make the decision to perform or breach, the seller’s expectancy is known with certainty; it is X dollars. Since only money is at stake, and it is of equal value to both parties, performance is always indicated; the extent of a payment obligation cannot be made to turn on either party’s “need” for the money. Thus, even a legal rule that led to no breach of contract would be efficient in the context of these transactions. This is, in fact, close to what is observed in the market; breach of contract is rare. — Lisa Bernestein, Opting out of the Legal System, 216

Categorization

• XREF: Connects to the economic argument that reputation bonds induce over-performance — here shown to be baseless in single-currency executory promises; links to standard law-and-economics contract theory (Coase, efficient breach doctrine).