Spring 2011 Workshops
Contract and Economic Organization
January 24, 2011
Yale Law School
Paper: Remedies On and Off Contract
(with Richard Brooks)
Easy availability of rescission followed by restitution has, for centuries, unsettled legal authorities, who fear it as a threat to commercial order or other normative values. Responding to these fears, authorities have limited the ease with which rescission may be elected. Their approach is often excessive and based on misunderstandings of the remedy’s effects. Rescission followed by restitution may in fact promote contracting by allowing parties to create efficient incentives. Concern about the stability of contracting is not entirely unfounded, but the problem is not primarily due to the ease with which promisees are able to rescind following breach, rather it is the remedy that follows rescission. This essay presents an argument for liberal rescission followed by limited ensuing remedies. Modern reforms and reform proposals seem to embrace the opposite route of restricting access to rescission while at times allowing for generous ensuing remedies. Ironically, these proposals, as demonstrated in the essay, pose the real threat to contractual stability.
February 7, 2011
Christopher R. Drahozal
University of Kansas
Paper:Arbitration and Profit
(with Peter B. Rutledge)
The choice of arbitration as a means of dispute resolution occurs in market settings. But not all participants in markets are for-profit businesses. In particular, financial institutions that issue credit cards include both for-profit firms (e.g., banks) and mutual (customer-owned) firms that operate on a not-for-profit basis (e.g., credit unions). This paper explores whether and in what ways these differing organizational forms might affect the choice of the means of dispute resolution. Anecdotal reports suggest that credit unions may be less likely than banks to include arbitration clauses in their standard form contracts with cardholders. This paper examines that possibility in detail, using data from a collection of credit card contracts newly available from the Federal Reserve. It finds that credit card issuers are less likely to use arbitration clauses when: (1) they are mutual firms (confirming the anecdotal reports); (2) they have lower outstanding balances of credit card loans; (3) they do not specialize in credit card lending; (4) they make less risky credit card loans; and (5) they are located in a state that has held class arbitration waivers unenforceable.
February 21, 2011
Yale Law School
Paper: Compensating Commitments:
The Law and Economics of Commitment Bonds That Compensate for the Possibility of Forfeiture
(with Michael Abramowicz)
This Article introduces compensating commitment bonds, which make it more affordable for a government, entity, or individual to commit to some course of action. These bonds, like traditional government or corporate bonds, can generate revenue for committing parties. A bond seller makes a commitment and promises to pay a forfeit if the seller fails to meet the bond conditions. The bond buyer pays the seller to be contractually designated as the recipient of any amounts the bond seller forfeits. This approach has potential application in a range of legal situations. Governments and other parties may use such bonds to facilitate commitments to principles from which they later may face temptation to deviate. Such bonds also can facilitate legislative compromise or the settlement of private legal disputes. The Article identifies a variety of incentive-equivalent commitment bond structures as well as the circumstances under which a particular implementation is likely to be most effective. It also explores hurdles to the use of such bonds, including the concerns that the courts might find a legislature’s use of such bonds to entrench its preferences unconstitutional and that a legislature might issue such bonds but cancel them after failing to maintain a commitment.
March 7, 2011
NYU Law School
Paper: Interpreting Boilerplate
This paper analyses the merits of alternative ways of interpreting contractual documents taking into account the fact that contracting parties often draft contracts using boilerplate documents rather than starting from scratch. Legal practices such as gap-filling, the use of extrinsic evidence, uniform laws, and allowing parties to choose the method used to interpret their documents are examined. One notable finding is that it is not necessarily desirable to allow parties to choose the method of interpretation. The analysis highlights the potential importance of the stock of boilerplate available to contracting parties as a factor that determines the impact of contract law.
March 28, 2011
UC San Diego
Topic: Hold Up and the Technology of Trade:
Lessons from Recent Theoretical Work
Paper: Contract, Renegotiation, and Hold Up: Results on the Technology of Trade and Investment
This paper examines a class of contractual relationships with specific investment, a non-durable trading opportunity, and renegotiation. Trade actions are modeled as individual and trade-action-based option contracts (“non-forcing contracts”) are explored. The paper introduces the distinction between divided and unified investment and trade actions, and it shows the key role this distinction plays in determining whether efficient investment and trade can be achieved. Under a non-forcing dual-option contract, the party without the trade action is made residual claimant with regard to the investment action, which induces efficient investment in the divided case. The unified case is more problematic; here, efficiency is typically not attainable but the dual-option contract is still optimal in a wide class of settings. More generally, the paper shows that, with ex post renegotiation, constraining parties to use “forcing contracts” implies a strict reduction in the set of implementable value functions.
Also included will be a short document for lawyers that explains the basic ideas. This will be available before the seminar date.
April 11, 2011
Duke University, Fuqua School of Business
Paper: Libertarian Paternalism, Information Sharing, and Financial Decision-Making
(with Bruce Ian Carlin and Gustavo Manso)
We develop a theoretical model to study the welfare effects of libertarian paternalism on information acquisition, social learning, and financial decision-making. Individuals in our model are permitted to appreciate and use the information content in the default options set by a social planner. We show that in some circumstances the presence of default options can decrease welfare by slowing information propagation in the economy. An extension of the model shows that partial information disclosures by the social planner can increase individuals’ incentives for gathering and sharing information, but that this does not affect the set of circumstances in which the absence of default options is optimal. Our analysis also considers a setting in which individuals can sell their information to others. We show that default options cause the quality (and price) of advice to decrease, which may lower social welfare. Finally, we study the effects of procrastination and excessive trust in the social planner on our analysis.
April 25, 2011
Columbia Department of Economics
Topic: Implementation with Evidence and Some Implications for Incomplete Contracting
Paper: Implementation with Evidence
(with Olivier Tercieux)
We generalize the canonical problem of Nash implementation (Maskin, 1977) by allowing agents to voluntarily provide discriminatory signals, i.e. evidence. Evidence can either take the form of hard information or, more generally, have differential but non-prohibitive costs in different states. In such environments, social choice functions that are not Maskin-monotonic can be implemented. We formulate a more general property, evidence-monotonicity, and show that this is a necessary condition for implementation. Evidence-monotonicity is also sufficient for implementation in a large domain. In some settings, such as when agents have small preferences for honesty, any social choice function is evidence-monotonic. Additional characterizations are obtained for hard evidence.
Please Note: The talk will be only loosely based on this paper; rather, I will talk about a broader set of issues and some new results that are not in the paper, hence the disparity between the title of the talk and the title of the paper.