Substantive entitlements are the commitments that form the essence of contracts. Any contract that does not consider every possible contingency is by definition incomplete and must have in place a governance structure that protects its substantive entitlements from uncoordinated and, in particular, uncompensated ex post escape. At the same time, the institutional design should leave room for welfare-enhancing ex post flexibility. Safeguarding efficient post-contractual discretion is the role of a contract's system of non-performance. To that end, signatories shape secondary and tertiary rules of contracting.

The benchmark for an incomplete contract is given by the achievable first-best, the efficient “breach” contract (EBC) (section 3.4 above). The EBC mimics the outcome of the hypothetical complete contingent contract. It strikes the optimal balance between flexibility and entitlement protection: every contractual entitlement is protected in a way that prohibits opportunistic opt-out. This is equivalent to saying that injurers may engage in flexibility so as to seize welfare-enhancing ex post non-performance opportunities without harming the victims of contractual escape. Whenever one of these two conditions fails to hold, the contractual system of non-performance is out of balance. If signatories to a contract provide for provisions that are unsuccessful in safeguarding the initially traded level of commitment, a signatory expecting to assume the role of a victim is likely to commit to less cooperation up-front. Unseized flexibility opportunities, on the other hand, discourage future injurers from engaging in contractual exchange in light of unforeseen or unanticipated contingencies.