1 George Mason School of Law Contracts I II.Why Enforce
Contracts F.H. Buckley [email protected] Slide 2 2 Contracts I 1.Why
Enforce Contracts Slide 3 3 Contracts I 1.Why Enforce Contracts
2.Formation of Contracts 3.Consideration 4.Relational Contracts
Slide 4 4 The two ways to understand the world Slide 5 5 By stories
By numbers Slide 6 6 By stories: Dickens Hard Times: Coketown Slide
7 7 Lloyds Bank v. Bundy [1973] 3 All E.R. 757 (C.A.) Broadchalke
is one of the most pleasing villages in England. Old Herbert Bundy,
the defendant, was a farmer there. His home was at Yew Tree Farm.
It went back for 300 years. His family had been there for
generations. It was his only asset. But he did a very foolish
thing. He mortgaged it to the bank. To the very hilt. Per Lord
Denning M.R. Slide 8 8 By numbers: Jeremy Benthams hedonic calculus
The 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) Slide 9 9 Jeremy Benthamreally The
auto-icon Slide 10 Numbers today The Law and Economics movement 10
Henry ManneRichard Posner Slide 11 Economic Analysis of Contract
Law Economics as an explanation for contract enforcement 11 Slide
12 Economic Analysis of Contract Law Economics as an explanation
for contract enforcement Economics as an explanation for the
contours of contract law Positive and normative 12 Slide 13
Economic Analysis of Contract Law Economics as an explanation for
contract enforcement Economics as an explanation for the contours
of contract law Contractarianism: The expansion of free bargaining
13 Slide 14 Economics as an explanation for contract enforcement
Printing & Numerical v. Sampson 14 Sir George Jessel M.R Slide
15 Printing & Numerical v. Sampson What was the promise and
what was the argument that it was against public policy? 15 Slide
16 Printing & Numerical v. Sampson What was the promise and
what was the argument that it was against public policy? The droit
dauteur 16 Slide 17 Printing & Numerical v. Sampson What was
the promise and what was the argument that it was against public
policy? And why did Jessel M.R. reject this? 17 Slide 18 Printing
& Numerical v. Sampson What was the promise and what was the
argument that it was against public policy? And why did Jessel M.R.
reject this? What happens when an academic promises to assign
rights to his future invention to his university? 18 Slide 19 They
didnt much care about this in the 1970s Whats wrong with this
contract? Aristotles zero-sum world: If one person gains, another
person has lost 19 Slide 20 The nihilism of the 1970s Whats wrong
with this contract? Consumerism: Its always Williams v.
Walker-Thomas 20 Slide 21 21 So why enforce contracts? Casebook
suggests two principles The Efficiency Norms of Law and Economics
An Autonomy Principle which well look at later Slide 22 Promising
and Efficiency The benefit afforded by promissory institutions is a
greater assurance of performance Which is strengthened when
contractual sanctions are added to moral ones. 22 Slide 23
Promising and Efficiency The benefit afforded by promissory
institutions is a greater assurance of performance So why is that
important? 23 Slide 24 Promising and Efficiency Lets assume (for
the moment) that contract enforceability has something to do with
societal wealth 24 Slide 25 Promising and Efficiency Lets also
assume (with Bentham) that happiness is a desirable goal 25 Slide
26 Promising and Efficiency So is happiness correlated with
societal wealth? 26 Slide 27 27 Slide 28 The Happiness Literature
Survey reports of subjective well-being Would you say that you are
very happy, pretty happy, or not too happy? And why that matters 28
Slide 29 The Happiness Literature The Easterlin paradox: The
Hedonic Treadmill For countries and individuals, a regression to
the mean over time Adaption set-points? Aspiration levels change?
29 Slide 30 The Happiness Literature But the relationship holds for
a snapshot at a single time 30 Slide 31 31 Slide 32 The Happiness
Literature The omitted variable problem: What about happiness and
freedom? 32 Slide 33 33 Slide 34 Heritage Ranking of Economic
Freedom 2011 CountryScoreCategory 1 Hong Kong89.7Free 2
Singapore87.2Free 3 Australia82.5Free 4 New Zealand82.3Free 5
Switzerland81.9Free 6 Canada80.8Free 7 Ireland78.7Partly Free 8
Denmark78.6Partly Free 9 United States77.8Partly Free 34 Slide 35
The earths economic center of gravity 35 Weighing locations by GDP
and projecting to the earths surface Slide 36 Where does contract
law come in? So if wealth makes people happy, does contract law
make people wealthy? 36 Slide 37 Where does contract law come in?
How about bare promises without contract enforcement? 37 Slide 38
38 Contracting as a Prisoners Dilemma 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
Slide 39 39 The paradox of the PD game While cooperation is
collectively rational, defection is individually rational. Slide 40
40 Hollywood gets in the act Russell Crowe as John Nash in A
Beautiful Mind Slide 41 41 The need for poetic license Slide 42 42
Modeling PD games Game theoretic problems: payoffs for each player
depend on actions of both Slide 43 43 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 Slide 44
44 Cooperate Player 1 Modeling Two-party choice Slide 45 45 Defect
Player 1 Modeling Two-party choice Slide 46 46 Cooperate Player 2
Modeling Two-party choice: Player 2 Slide 47 47 Defect Player 2
Modeling Two-party choice Player 2 Slide 48 48 CooperateDefect
Cooperate Both cooperate Defect Player 2 Player 1 Modeling
Two-party Choice Both Cooperate Slide 49 49 CooperateDefect
Cooperate Defect Both defect Player 2 Player 1 Modeling Two-party
Choice Both Defect Slide 50 50 CooperateDefect Cooperate Player 1
cooperates, Player 2 defects Defect Player 2 Player 1 Modeling
Two-party Choice Suckers payoff for Player 1 Slide 51 51
CooperateDefect Cooperate Defect Player 1 defects, Player 2
cooperates Player 2 Player 1 Modeling Two-party Choice Player 1s
temptation to defect Slide 52 52 CooperateDefect Cooperate Joint
cooperation Player 1: suckers payoff Defect Player 2: Suckers
payoff Joint defection Player 2 Player 1 Bargains as a Prisoner
Dilemma game Cooperation: Promise and Perform Defect: Promise and
Breach Slide 53 53 CooperateDefect Cooperate3, 3-1, 4 Defect4, -10,
0 Player 2 Player 1 Plugging in payoffs First number is payoff for
Player 1, Second number is payoff for Player 2 Slide 54 54
Cooperate 3 Defect4 Player 1 What should Player 1 do if he knows
Player 2 will cooperate? Player 2 Slide 55 55 Cooperate 3 Defect4
Player 1 What should Player 1 do if he knows Player 2 will
cooperate? Player 2 Player 1 gets 3 if he cooperates and 4 if he
defects So he defects Slide 56 56 Cooperate 3 Defect4 Player 1 What
should Player 1 do if he knows Player 2 will cooperate? Slide 57 57
Defect Cooperate Defect0 Player 1 What should Player 1 do if he
knows Player 2 will defect? Slide 58 58 Defect Cooperate Defect0
Player 1 What should Player 1 do if he knows Player 2 will defect?
Slide 59 59 CooperateDefect Cooperate3 Defect40 Player 1 Defection
dominates for Player 1 Slide 60 60 CooperateDefect Cooperate34
Defect Player 2 What should Player 2 do if he knows Player 1 will
cooperate? Slide 61 61 CooperateDefect Cooperate34 Defect Player 2
What should Player 2 do if he knows Player 1 will cooperate? Slide
62 62 CooperateDefect Cooperate Defect0 Player 2 What should Player
2 do if he knows Player 1 will defect? Slide 63 63 CooperateDefect
Cooperate Defect0 Player 2 What should Player 2 do if he knows
Player 1 will defect? Slide 64 64 CooperateDefect Cooperate34
Defect0 Player 2 Defection dominates for Player 2 Slide 65 65
CooperateDefect Cooperate Defect 0 Player 2 Defection dominates for
both Players Slide 66 66 The paradox of the PD game While
cooperation is collectively rational, defection is individually
rational. Slide 67 67 The paradox of the PD game While cooperation
is collectively rational, defection is individually rational. The
undersupply of cooperation isthe tragedy of the commons. Garrett
Hardin, The Tragedy of the Commons (1968). Slide 68 68 The Tragedy
of the Commons and the Law of the Sea ) Slide 69 69 The Tragedy of
the Commons: Ranchers (open land) vs farmers (private property) )
The Man Who Shot Liberty Valance (1962) Slide 70 70 CooperateDefect
Cooperate Joint cooperation: Both perform Player 1 performs, Player
2 breaches Defect Player 1 breaches, Player 2 performs Both defect:
Neither performs Player 2 Player 1 Two-party Choice in Contracting
Slide 71 71 Joint Cooperation Everyone promises and performs Im
worried about Tessio The food is better at the Tattaglias Slide 72
72 CooperateDefect Cooperate Joint cooperation: Both perform Player
1 performs, Player 2 breaches Defect Player 1 breaches, Player 2
performs Both defect: Neither performs Player 2 Player 1 Joint
Defection Slide 73 73 Joint defection Can these gentlemen be acting
efficiently? In what sense is this joint defection? Slide 74 74
CooperateDefect Cooperate Joint cooperation: Both perform Player 1
performs, Player 2 breaches Defect Player 1 breaches, Player 2
performs Both defect: Neither performs Player 2 Player 1 The
Suckers Payoff Slide 75 75 The Suckers payoff Sucker performs,
other party defects GONERIL 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 Slide 76 76 CooperateDefect Cooperate Joint
cooperation: Both perform Player 1 performs, Player 2 breaches
Defect Player 1 breaches, Player 2 performs Both defect: Neither
performs Player 2 Player 1 The Defectors Payoff Slide 77 77 The
Defectors Payoff Defector breaches, sucker performs Gov. 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." Slide 78 78 PD games help to explain why we do dumb
things Over-fish lakes and oceans Pollute Arms race Slide 79 79 PD
games and Constitutional Law Let us suppose you are charged with
writing a constitution Slide 80 80 PD games and Constitutional Law
Let us suppose you are charged with writing a constitution Your
first question, logically, is why should a state exist Slide 81 81
PD games and Constitutional Law Let us suppose you are charged with
writing a constitution Your first question, logically, is why
should a state exist Hint: what were the first four Federalist
Papers about? Slide 82 82 Military Expenditures: NATO countries
Slide 83 83 PD games help to explain why we do dumb things
Over-fish lakes and oceans Pollute Arms race Fail to exploit
bargaining gains Slide 84 84 What if contracts are prohibited?
Slide 85 85 What if contracts are prohibited? Rembrandt, The Jewish
Bride 1666 Marriage is more than a contract; its a covenant Slide
86 86 What if contracts are prohibited? Rembrandt, The Jewish Bride
1666 But its less than a contract if the parties have unilateral
exit rights under no-fault divorce laws Slide 87 87 Marriage,
Divorce, Natality What did no-fault divorce do to the cost of
matrimonial fault? Slide 88 88 Marriage, Divorce, Natality 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
one So fault is costly in a fault regime Slide 89 89 Marriage,
Divorce, Natality 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 Slide 90 90 Marriage, Divorce, Natality How would you
expect the parties to react to the increased probability of
divorce? Slide 91 91 Marriage, Divorce, Natality How would you
expect the parties to react to the increased probability of
divorce? Fewer marriages Slide 92 92 Marriage, Divorce, Natality
How would you expect the parties to react to the increased
probability of divorce? Fewer marriages Increased female
participation in the labor force Slide 93 93 Marriage, Divorce,
Natality How would you expect the parties to react to the increased
probability of divorce? Fewer marriages Increased female
participation in the labor force Increased human capital
investments by women Slide 94 94 Marriage, Divorce, Natality How
would you expect the parties to react to the increased probability
of divorce? Fewer marriages Increased female participation in the
labor force Increased human capital investments by women And what
about kids? Slide 95 95 Children as marriage-specific assets
Divorce rate 1965-83 Natality rate for married couples 1965-83
Slide 96 96 Contractarianism Might other branches of the law, apart
from contract, be amenable to bargaining? Slide 97 97
Contractarianism Might other branches of the law, apart from
contract, be amenable to bargaining? Family Law Corporate Law
Bankruptcy Secured Lending Slide 98 98 Contractarianism Might other
branches of the law, apart from contract, be amenable to
bargaining? What might constrain the parties from entering into a
bargain? Slide 99 99 Contractarianism What might constrain the
parties from entering into a bargain? Illegal Contracts Article 9
barriers to security interests in consumer goods Waivers of divorce
rights Slide 100 100 Contractarianism What might constrain the
parties from entering into a bargain? Illegal Contracts Article 9
barriers to security interests in consumer goods Waivers of divorce
rights Recall Jessel in Printing & Numerical v. Sampson Slide
101 101 Contractarianism What might constrain the parties from
entering into a bargain? Transaction Costs Slide 102 102
Contractarianism The Coase Theorem: Parties will enter a binding
contract to exploit all bargaining games unless prevented from
doing so by transaction costs Ronald Coase Slide 103 So what are
transaction costs? 103 Give examples of things that get in the way
of bargaining Slide 104 So what are transaction costs? 104 Too many
parties. Eg, pollution Slide 105 So what are transaction costs? 105
Emergencies: No time to bargain Slide 106 So what are transaction
costs? 106 Information processing problems Slide 107 107 War as a
Coasian Problem: Why no peace treaty? Uccello, Battle of San Romano
Slide 108 108 War as a Bargaining Problem The Absence of a
Bargaining Space President Bashar al-Assad Slide 109 109 War as a
Bargaining Problem Too many parties? Slide 110 110 War as a
Bargaining Problem Informational Problems So youre telling me
theres something wrong with attacking uphill and across a river?
Ambrose Burnside December 1862 Slide 111 111 War as a Bargaining
Problem Agent Misbehavior What was Sir Charles Napiers explanation
for his capture of Sindh in 1843? Slide 112 112 War as a Bargaining
Problem Agent Misbehavior Peccavi. Slide 113 113 All we are saying
is Give Contracts a Chance Iranians employing the defect strategy
Slide 114 Is there no cooperation without binding contracts? 114
Slide 115 Cooperation without Law? Voting as an economic puzzle 115
Slide 116 Cooperation without Law? Voting No littering 116 Slide
117 Cooperation without Law? 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 117 Slide 118 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 118 Slide 119 Open Source Software 119 Linux
Mascot Slide 120 Crowdsourcing 120 Slide 121 Bloggers vs.
Mainstream Media 121
