Working Paper No. 02-02:
Freedom of Contract and the Laws of Entropy


Francesco Parisi

Date Posted: 2002

Abstract (below) | Full text (most recent) on SSRN


In this paper I consider the twofold relationship between freedom of contract and entropy in property. Recent literature on property fragmentation suggests that property is subject to a fundamental law of entropy, leading towards increasing property fragmentation. After considering the legal responses to the problem of entropy, I revisit the above debate considering the relevance of freedom of contract to achieve optimal outcomes in a world of imperfect information and positive transaction costs. In such a context, I discern two analytically distinct ways in which freedom of contract contributes to minimizing the problems of entropy. I conclude that entropy is not an ontological problem, but is often the byproduct of the uncoordinated use of institutional and legal constraints on free contractual arrangements.