How do uncertainty and opportunism make long-term contracts harder to enforce?

In transaction cost economics, long-term contracts are difficult to enforce because they are vulnerable to the interplay of uncertainty and human behavior.1

The Role of Uncertainty and Opportunism

• Uncertainty: The economic environment is inherently unpredictable. Because individuals possess bounded rationality—meaning they are limited in the information they can process—it is impossible to write comprehensive contracts that account for every possible future contingency.1
• Opportunism: Opportunism assumes that individuals are self-interested and may take advantage of others by reneging on agreements, misrepresenting intentions, or changing deal terms when it benefits them.2

When a transaction involves substantial uncertainty and irreversible investments, the risk of an exchange partner acting opportunistically increases. Because parties cannot foresee all future events, they cannot effectively contract against every potential breach. Consequently, when the threat of opportunism is high, economic actors often shift away from market-based contracts toward hierarchies (such as firms). Hierarchies provide supervisory and monitoring mechanisms to deter opportunistic behavior that simple contracts cannot address.21