1 George Mason School of Law Contracts I B.Why Enforce Contracts F.H. Buckley [email protected].

*George Mason School of Law

Contracts I

B.Why Enforce Contracts

F.H. [email protected]

*Last day

We wouldnt want all contracts to be enforcedFraud and DuressErrorUnconscionability?More controversially, a role for distributive justice?

*A presumption of enforceability

But lets start with the presumption that contracts should otherwise be enforceable

And that comes is best understood from the perspective of law-and-economics

*Law and Economics: Understand the world through numbers

Can we count up pleasure and pain?

*By numbers: Jeremy Benthams hedonic calculusThe principle of utility is the foundation of the present work: it will be proper therefore at the outset to give an explicit and determinate account of what is meant by it. By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words, to promote or to oppose that happiness. I say of every action whatsoever and therefore not only of every action of a private individual, but of every measure of government.Principles of Morals and Legislation (1789)

*By numbers: Jeremy Benthams hedonic calculus

The principle of utility: Utilitarianism

*Jeremy Benthamreally The auto-iconFounder of University College,London

The Law and Economics movement as an application of utilitarianism*Henry ManneRichard Posner

Economic Analysis of Contract LawEconomics as an explanation for why we enforce contracts*

Economic Analysis of Contract LawEconomics as an explanation for why we enforce contracts

Economics as an explanation for the contours of contract lawPositive and normative

*

Economic Analysis of Contract LawEconomics as an explanation for contract enforcement

Economics as an explanation for the contours of contract law

*

Economics as an explanation for contract enforcementPrinting & Numerical v. Sampson

*Sir George Jessel M.R

Printing & Numerical v. Sampson

When, per Jessel, should contracts not be enforced because they are against public policy?

Private vs. Public Law

*


What was the promise here and what was the argument that it was against public policy?

*


What was the promise here and what was the argument that it was against public policy?Sale of future inventions Fetters on improvements?

*


Why per Jessel is public policy on the side of contract enforcement?*


If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. *


Who benefits in a case such as this from contract enforcement?*


Who benefits?A man who is a needy and struggling inventor may well agree either for a present payment in money down, or for an annual payment, to put his intellectual gifts at the service of a purchaser. *

Promising and Efficiency

The benefit afforded by promissory institutions is a greater assurance of performance

So why is that important?*


Lets assume (for the moment) that contract enforceability has something to do with societal wealth

*


Lets also assume (with Bentham) that happiness is a desirable goal*


So is happiness correlated with societal wealth?

*

The Happiness Literature

Survey reports of subjective well-beingWould you say that you are very happy, pretty happy, or not too happy?*

The Happiness Literature: Frey & Stutzer

The Easterlin paradox: The Hedonic TreadmillFor countries and individuals, a regression to the mean over timeAdaption set-points?Aspiration levels change?Relative preferences and the rise of inequality?*


But the relationship holds for a snapshot at a single time, for nations and individuals both*


The omitted variable problem: What about happiness and freedom?*

Heritage Economic Freedom 2014*

1Hong Kong90.1Free2Singapore89.4Free3Australia82.0Free4Switzerland81.6Free5New Zealand81.2Free6Canada80.2Free7Chile78.7Partly Free8Mauritius76.5Partly Free9Ireland76.2Partly Free10Denmark76.1Partly Free11Estonia75.9Partly Free12United States75.5Partly Free

The earths economic center of gravity*Weighing locations by GDP and projecting to the earths surface

Where does contract law come in?

Freedom makes people happyAnd contract enforcement promotes freedom per Jessel.Wealth makes people happy And contract enforcement make people wealthy per Jessel*

Where does contract law come in?

Exploiting bargaining gains through contract enforcement

And how we leave money on the table without contract enforcement*

*Contracting as a solution to the Prisoners Dilemma game

A simple game that has become the dominant paradigm for social scientists since it was invented about 1960.

How the game works and why did not work for Dilbert

*The paradox of the PD gameWhile cooperation is collectively rational, defection is individually rational.

*Hollywood gets in the actRussell Crowe as John Nash in A Beautiful Mind

*The need for poetic license

*Modeling PD games

Game theoretic problems: payoffs for each player depend on actions of both

*Modeling PD games

Game theoretic problems: payoffs for each player depend on actions of both

Two possible strategies: A party cooperates when he performs value-increasing promises, and defects when he breaches

*Player 1Modeling Two-party choice

Cooperate

*Player 1Modeling Two-party choice

Defect

*Player 2Modeling Two-party choice: Player 2

Cooperate

*Player 2Modeling Two-party choicePlayer 2

Defect

*Player 2Player 1Modeling Two-party Choice Both Cooperate

CooperateDefectCooperateBoth cooperateDefect

*Player 2Player 1Modeling Two-party ChoiceBoth Defect

CooperateDefectCooperateDefectBoth defect

*Player 2Player 1Modeling Two-party ChoiceSuckers payoff for Player 1

CooperateDefectCooperatePlayer 1 cooperates, Player 2 defectsDefect

*Player 2Player 1Modeling Two-party ChoicePlayer 1s temptation to defect

CooperateDefectCooperateDefectPlayer 1 defects, Player 2 cooperates

*Player 2Player 1Bargains as a Prisoner Dilemma game Cooperation: Promise and PerformDefect: Promise and Breach

CooperateDefectCooperateJointcooperationPlayer 1: suckers payoffDefectPlayer 2: Suckers payoffJointdefection

*Player 2Player 1Plugging in payoffsFirst number is payoff for Player 1,Second number is payoff for Player 2

CooperateDefectCooperate3, 3-1, 4Defect4, -10, 0

*Player 1

What should Player 1 do if he knows Player 2 will cooperate?Player 2

CooperateCooperate3Defect4

*Player 1

What should Player 1 do if he knows Player 2 will cooperate?Player 2Player 1 gets 3 if he cooperates and 4 if he defectsSo he defects


*Player 1What should Player 1 do if he knows Player 2 will cooperate?


*Player 1

What should Player 1 do if he knows Player 2 will defect?

DefectCooperate-1Defect0

*Player 1What should Player 1 do if he knows Player 2 will defect?

DefectCooperate-1Defect0

*Player 1Defection dominates for Player 1

CooperateDefectCooperate3-1Defect40

*Player 2

What should Player 2 do if he knows Player 1 will cooperate?

CooperateDefectCooperate34Defect

*Player 2What should Player 2 do if he knows Player 1 will cooperate?

CooperateDefectCooperate34Defect

*Player 2What should Player 2 do if he knows Player 1 will defect?

CooperateDefectCooperateDefect-10

*Player 2Defection dominates for Player 2

CooperateDefectCooperate34Defect-10

*Player 2Defection dominates for both Players

CooperateDefectCooperateDefect0


The undersupply of cooperation is the tragedy of the commons. Garrett Hardin, The Tragedy of the Commons (1968).

*The Tragedy of the Commons and the Law of the Sea)

*The Tragedy of the Commons: Ranchers (open land) vs farmers (private property))The Man Who Shot Liberty Valance (1962)

*Player 2Player 1Two-party Choice in Contracting

CooperateDefectCooperateJoint cooperation:Both performPlayer 1 performs, Player 2 breachesDefectPlayer 1 breaches, Player 2 performsBoth defect:Neither performs

*Joint Cooperation Everyone promises and performsIm worried about TessioThe food is better at the Tattaglias

*Player 2Player 1Joint Defection


*Joint defection Can these gentlemen be acting efficiently?In what sense is this joint defection?

*Player 2Player 1The Suckers Payoff


*The Suckers payoff Sucker performs, other party defectsGONERIL Hear me, my lord; What need you five and twenty, ten, or five, To follow in a house where twice so many Have a command to tend you? REGAN What need one? KING LEAR O, reason not the need

*Player 2Player 1The Defectors Payoff


*The Defectors Payoff Defector breaches, sucker performsGov. Earl K. Long"Don't write anything you can phone. Don't phone anything you can talk. Don't talk anything you can whisper. Don't whisper anything you can smile. Don't smile anything you can nod. Don't nod anything you can wink."

"I can make them voting machines sing Home Sweet Home."

*PD games help to explain why we do dumb things

Over-fish lakes and oceans

Pollute

Arms race

*PD games help to explain why we do dumb things

Over-fish lakes and oceans

Pollute

Arms race

Fail to exploit bargaining gains

*What if contracts are prohibited?

*What if contracts are prohibited?Rembrandt, The Jewish Bride 1666Marriage is more than a contract; its a covenant

*What if contracts are prohibited?Rembrandt, The Jewish Bride 1666But its less than a contract if the parties have unilateral exit rights under no-faultdivorce laws

*Marriage, Divorce, Natality

What did no-fault divorce do to the cost of matrimonial fault?


What did no-fault divorce do to the cost of matrimonial fault?Under fault, the straying party pays if he wants a divorceor if his spouse seeks oneSo fault is costly in a fault regime


What did no-fault divorce do to the cost of matrimonial fault?

So how do you think no-fault divorce laws affected divorce levels? Bring and Buckley, 18 Int. Rev. Law & Econ. 325 (1998)Subsidize something (or reduce costs) and you get more of it


How would you expect the parties to react to the increased probability of divorce?


How would you expect the parties to react to the increased probability of divorce?Fewer marriages


How would you expect the parties to react to the increased probability of divorce?Fewer marriagesIncreased female participation in the labor force


How would you expect the parties to react to the increased probability of divorce?Fewer marriagesIncreased female participation in the labor forceAnd what about kids?

*Children as marriage-specific assetsDivorce rate 1965-83 Natality rate for married couples 1965-83

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*Contractarianism

Might other branches of the law, apart from contract, be amenable to bargaining?

*Contractarianism

Might other branches of the law, apart from contract, be amenable to bargaining?Family LawCorporate LawBankruptcySecured Lending

*Contractarianism

Might other branches of the law, apart from contract, be amenable to bargaining? What might constrain the parties from entering into a bargain?

*Contractarianism

What might constrain the parties from entering into a bargain?Illegal ContractsArticle 9 barriers to security interests in consumer goodsWaivers of divorce rights

*Contractarianism

What might constrain the parties from entering into a bargain?Illegal ContractsArticle 9 barriers to security interests in consumer goodsWaivers of divorce rights

Recall Jessel in Printing & Numerical v. Sampson

*Contractarianism

What might constrain the parties from entering into a bargain?Transaction Costs

*ContractarianismThe Coase Theorem: Parties will enter a binding contract to exploit all bargaining games unless prevented from doing so by transaction costsRonald Coase

So what are transaction costs?*Give examples of things that get in the way of bargaining

So what are transaction costs?*Too many parties. Eg, pollution

So what are transaction costs?*Emergencies: No time to bargain

So what are transaction costs?*Information processing problems

*War as a Coasian Problem: Why no peace treaty?Uccello, Battle of San Romano

*War as a Bargaining ProblemThe Absence of a Bargaining SpacePresident Bashar al-Assad (and family?) in Vogue

*War as a Bargaining ProblemToo many parties?

*War as a Bargaining ProblemInformational ProblemsSo youre telling me theres something wrong with attacking uphill and across a river?

Ambrose BurnsideDecember 1862

*War as a Bargaining ProblemAgent MisbehaviorWhat was Sir Charles Napiers explanation for his capture of Sindhin 1843?

*War as a Bargaining ProblemAgent MisbehaviorPeccavi.

*All we are saying is Give Contracts a ChanceIranians employing the defect strategy

Is there no cooperation without binding contracts?*

Cooperation without Law?

Voting as an economic puzzle*


VotingNo littering*


Its 1998. There are two plans for an online dictionary. One is Encarta, promoted by Microsoft, which hires editors. The other relies on individuals to submit entries for free*

Wikiconomics

Its 1998. There are two plans for an online dictionary. One is Encarta, promoted by Microsoft, which hires editors. The other relies on individuals to submit entries for free*

Open Source Software*Linux Mascot

Crowdsourcing*

Bloggers vs. Mainstream Media*

*************************************************************************

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1 George Mason School of Law Contracts I B.Why Enforce Contracts F.H. Buckley [email protected].

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