ContractReputationalEnforcementInaworldwithoutlegalenforcementofcontractsIfIbreakacontract,otherpeoplewon’twanttocontractwithmeAsideeffectofthirdpartieswantingtoprotectthemselvesItdependsontheirknowingIwastheoneresponsibleIclaimitwasyourfaultIfthirdpartiescannoteasilytell,theyavoidbothofusSoyou,anticipatingthat,don’taccusemeofbreakingthecontractAndreputationalenforcementdoesn’tworkOnesolutionistolowertheinformationcosttothirdpartiesAnotheristopostabondwithatrustedthirdpartyarbitratorContractEnforcementinCyberspacePublickeyencryption:Questions?WeagreeonacontractandanarbitratorBothofusdigitallysignthecontractAnditincludesthepublickeyofthearbitratorIbreakthecontract,youappealtothearbitrator,herulesagainstmeHewritesuphisdecision,signsitusinghisprivatekeyAnyonecanprove,bycheckingthesignaturesThatthearbitratorIagreedoninadvanceruledagainstmeThusreducingtheinformationcosttothirdpartiestonearzeroImperialChineseSolutionDesigncontractstominimizethecosttothirdpartiesofknowingwhobrokethemOwnershipgoeswithpossessionCaveatemptor—IamresponsibleforcheckinggoodswhenIbuythemChop:Aseal.ThelowtechversionofadigitalsignaturePutthetemptationtobreachonthepartywithareputationalincentivenottoIfthesellercanbetrusted,payinadvanceIfthebuyercanbetrusted,payonreceiptSowhydowehavecontractlaw?TodecideifthereisacontractCourtsmaynotwishtoenforceallcontractseitherbecauseTheydonottrustindividualstoactintheirowninterest(paternalism)orTheybelievesomecontractshavelargeeffectsonthirdparties[Perhaps,inabilitytocontractactsasacommitmentstrategy]BecausethereisneverenoughsmallprinttocovereverythingIfthecourt’sdefaultrulesareknown,partiescanleavethingsoutUnlesstheydisagreewiththedefaultruleTheCaseforFreedomofContractCoaseTheoreminalowtransactioncostcontextWhataboutamonopolyseller?ItstillpaysmetoincludefeaturesthatbenefityoumorethantheycostmeButcontracttermscanbeusedforpricediscriminationAnalternativetochargingthosewhovaluetheproductmoreahigherpriceProvideacontracttunedinfavorofthemarginalcustomerEvenifdoingsoisinefficientTheresultdoesnotholdifpriceisfixed:anapartmentunderrentcontrolItpaysthelandlordtolowerqualityifdoingsosaveshimmoneyEvenifitisinefficientSothereisanargumentformandatoryterms(andforabolishingrentcontrol)TheCaseAgainstFreedomofContractContractsthatimposecostsonthirdpartiesHiringahitmanContractsinrestraintoftrade—cartelagreementsContractsbypeoplenotcompetenttoactintheirowninterestChildren,lunaticsSpendthrifts?Contractsthecourtbelievescouldonlyhavebeensignedbypeoplenotcompetentto…ActualDuressShouldacontractunderduressbeenforceable?Argumentfor:Iprefermylife,whichiswhyIagreeArgumentagainst:Itmakesmuggingmoreprofitable,somoremuggingPinochetcaseMilitarydictatoragreestogiveuppowerinexchangeforimmunityShouldthecontractbebroken?Parolepriortothe19thcenturyPrisonersofwargavetheirparole,gottoliveintheinn,notthejailBenefit:WarislessunpleasantCost:AndtherefortherewillbemoreofitUnequalBargainingPowerasDuress?Youarelostinthedesert,IhavewaterMyprice:EverythingyouownplushalfyourincomeforeverYouarebetteroffifthatcontractisnotenforceableThatisrelevantonlywhereUnenforceabilitysubstitutesforacommitmentstrategyAwayoflimitingwhatyoucanpayinabilateralmonopolyAndeventhere,myhighpricehassomeefficiencybenefitItmakesitmoreworthwhilebeinginthedesertwithwaterLookingforlostpeopledyingofthirstWhichisagoodthingButitalsomakesyouinefficientlyreluctanttotravelinthedesertThisisthesameCoaseandoublecausationproblemasthesinkingshipWecan’toptimizeontwomarginswithonepriceWhatcountsasduress?Yourshipissinking.ThetugwantstochargeyoumostofwhatitisworthYouagree.Whenyougetbacktoshore,canyourenegeonthecontract?Isthisduress?Unlikethemuggingcase,theeffectoftheincentiveonthetugisgoodWhatistheefficientpriceforsavingtheship?Thepricethatgivesthetugboattherightincentivetobeoutthere?Thepricethatgivesyoutherightincentivenottogooutinbadweather?ThisisCoase’sdualcausationproblemBargainingoveranenforceablecontractonasinkingshipIsabilateralmonopolygameBargainingbreakdownmeanstheshipsinksWhichisanargumentagainstanenforceablecontractEitherhavethesalvagepricesetbytheadmiraltycourtorBargainedinadvancebetweentheshipownerandthetugownerLooksverymuchlikethewaterinthedesertcaseContractsofAdhesionAformcontractItpaysAvistodesignefficienttermsSoconstraintsonwhatthecourtwillenforcemakebothpartiesworseoffWhydoesAvisnotbargainovereachcontract?ThatwouldincreasetransactioncostsAndmakeiteasierfortheiremployeestoacceptbribesforbettertermsIsthereacontract?FormalitiessoweandthecourtknowifthereisThedoctrineofconsiderationLostcatsIpostarewardoffer,youfindthecatandreturnit,notknowingoftherewardWhenyoufindout,canyoucollectthereward?Ifyoucan,Iwillbelesslikelytopostareward,but…Ifyouseealostcatyouwillbemorelikelytotrytolocatetheowner,becausetheremightbearewardyoudon’tknowaboutMedicalservicesforanunconsciousvictimChargingforthemisanegativePigouviantaxWedon’tusuallyhavethoseforservices,becauseapropertyruleworksbetterButifIamunconsciousIcan’tagreetohireyouHowshouldacourtfillinmissingterms?FigureoutwhatthepartieswouldhaveagreedtoBecausethosearetheefficientterms,andDoingitthatwayreducestheneedtowriteamoredetailedcontractAllocatingRiskIfsomethinggoeswrongdevelopingmyfilmWhichhappenstobeunusuallyvaluable–HimalayanexpeditionphotographerWhoshouldbeliable?EconomicsofinsuranceRiskAversion:MakeWalgreensliabletospreadriskMoralHazard:IfWalgreensisliable,photographerwon’ttellthemAdverseSelection:IfWalgreensisliableitdoesn’tknowifitshoulddothejobProcessingveryvaluablefilmisexpensivetodoifyouareliableTheremightbenopricethephotographerwouldpayatwhichWalgreenswouldagreetodoitGiventhealternativeofhavingitprocessedbyaspecialistinhandlingvaluablefilmRulesforBreachSomecontractsshouldbebreachedWhencircumstanceschange,suchthatPerformancenowresultsinanetlossWhatrulesgivetherightincentivesTobreachwhenperformingisanetnegativeTosignacontractwhendoingsoisanetpositiveFordecisionsduringperformanceDoIbearcoststhatareawasteifthecontractgetsbreached?Thatdependsonwho,incaseofbreach,paysforthemIntheusualcontextofindividualsactingintheirowninterestWhichdependsonwhathappensifthereisabreachAndpossiblyonbargainingAlternativeRulesNodamages:Ifprofitgoesnegativeforme,Ibreach,evenifnetprofitforbothofusisstillpositiveThatmightbeavoidedbyrenegotiatingthecontractButthatopensupthepossibilityofcontinuousexpensiverenegotiationsSpecificperformance:NobreachwithoutpermissionNowyoudon’tbreachevenwhendoingsoisefficientBut…againbargainingcansolvethatproblemExpectationdamages:Makethevictimaswelloffasifyouhadn’tbreachedGivesefficientbreachSinceitonlypaysmetobreachifmygainislargerthanyourlossReliancedamages:Makethevictimaswelloffasifhehadn’tsignedthecontractGivesefficientsigningwhenonepartyknowsmoreabouttheriskofhavingtobreachButinefficientreliance.Ibuildthenewfactory,knowingthatifyoubreachyoupayforitExpectationdamageshasthesameproblemLiquidateddamages:PartiesagreeinadvanceondamagesforbreachNowrelianceexpendituresdonotincreasewhatyougetifIbreach,soefficientrelianceCouldsettheamountatwhatexpectationorreliancedamageswouldbe.But…ThisrequiresthatweknowthatatthetimeofsigningContractsWithAsymmetricInformationAfterthetreatyendingthewarof1812andtheblockadeofNewOrleanswassignedOrgan,withadvanceinformation,orderedtobaccofromLaidlawWhenthetreatybecamepublicLaidlawtriedtocancel,lostinthecourtWhatistheargumentagainstthatverdict?ThetransactionproducednonetbenefitMadeOrganmoneyatLaidlaw’sexpenseWhichgaveOrgananincentivetospendresourcesgettingearlynewsAndasuspiciousLaidlawanincentivetodeclinewhatmightbeaprofitableofferDeadweightcostsduetorentseekingCoststoOrgantotransferwealthfromLaidlawCoststoLaidlawofdefendinghimselffromsuchatransferTheargumentfor:GivingpeopleanincentivetoacquireinformationSpeculationItproducesabenefitbysmoothingoutpricemovementsAsuccessfulspeculatorbuyswhenpricesarelow,pushingthemupSellswhentheyarehigh,pushingthemdownWhichmakesfamineslesslikelyThesuccessfulspeculatoristransferringgrainfromtimeswhenthereislots,pricelowTotimeswhenthereislittle,pricehigh,andmakingmoneydoingitBecausehecorrectlypredictedtheshortageItproducesprofitsforthosewhocorrectlypredictpricemovementsButtheprofitsarenotameasureofthesocialbenefitSpeculationmightbeprofitableevenwhenitprovidednobenefitInwhichcaseresourcesspentdoingitareadeadweightcostConsidertradersgettingtheirordersinfiftymillisecondsfasterAtthecostofputtinginhighspeedlinkstothemarketAndhighendcomputersLongTermContracts:FamilyLawWhyHaveLong-termContracts?Whynothandleeverythingasaspotmarket?Insomerelationships,partnersacquirerelationshipspecificskillsConvertingacompetitivemarkettoabilateralmonopolyLongtermcontracts,signedatthestart,areapartialsolutionThecasefortraditionalmarriageEliminatingtheoptionofthreateningtoleavereducessomebargainingcostsSocialcustomsonthedivisionofresponsibilitiesreducesothersAttheriskofbeingstuckwithawrongchoiceorawrongdivisionAndyoucannotenforcecontracttermsthatarenotobservableMymedievalIslamicstoryonthesubjectChangesOverthePastCentury+DivorceUsedtobelegallydifficultanduncommonIsnoweasyandcommon1900lessthanoneper1,000people1980morethanfiveper1,000,nowdowntoaboutthreeper1,000MostcoupleshadasexualdivisionoflaborHusbandworkedoutsidethehomeforincomeWiferanthehouseholdAlthoughalesssharpdivisionforfarmers,whichmanypeoplewereMostadultswerepartofahusband-wifecouple,nowabouthalfAlmostallchildrenwereborninwedlock1940U.S.Illegitimacyrateabout4%1999about33Whydidthesechangeshappen?HousewifeceasedtobeafulltimejobbecauseInfantmortalityratesdropped,sodidn’thavetorearsomanykidsAlotofhouseholdproductionmovedoutofthehouse“Itisaformidablelistofjobs:thewholeofthespinningindustry,thewholeofthedyeingindustry,thewholeoftheweavingindustry.Thewholecateringindustryand—whichwouldnotpleaseLadyAstor,perhaps—thewholeofthenation’sbrewinganddistilling.Allthepreserving,picklingandbottlingindustry,allthebacon-curing.”(DorothySayersontraditionalwomen’swork)SincewomenwerelessspecializedtobeingthewifeofaparticularmanThecostsofendingamarriage,whilestillsubstantial,weresmallerSolessincentivetomakeandkeeplongtermcontractsConsequencesofEasyDivorceConsideralongtermcontractinwhichAperformsearly,BlateIfthecontractisnotenforceableAperformsandBbreaches.Opportunisticbreach,notefficientbreachInatraditionalmarriage,thewifeperformsearly,thehusbandlateProducingandrearingchildrenisthehardpartofthewife’sjobThehusband’sincomeusuallyrisesovertimeSowitheasydivorce,somehusbandsbreachopportunisticallyOncepeopleadjust,howwouldwomenrationallyrespond?Specializelessinbeingawife,moreinmarketskillsPostponeandspreadoutchildbearingBelesslikelytomarryatallOut-of-WedlockBirths:PossibleExplanationsWelfareforsinglemothersmadesinglemotherhoodmoreviableThatcouldexplainariseamongpoorpeoplebutTherateisup,althoughnotasmuch,fornot-poortooIncreasingacceptabilityofnon-marriageequivalentsCouplesinlongtermrelationshipswithoutamarriagelicenseButintheU.S.,atleast,alotofthosechildrenareinsingleparentfamiliesAsurplusofwomenonthemarriagemarketrelativetothepastBecausewomennowhardlyeverdieinchildbirthIn1900,~1%ofbirthsresultedindeathforthemother,andwomenhadalotofchildrenWoodhill’sadditionalargumentBirthrateswerehighjustafterWWII—thebabyboomWomenusuallymarrymenafewyearsolderthantheyareAwomanbornin1947waslookingforamanbornin1945Ifshecouldn’tfindahusband…Inaricherworld,morewomenwhodidn’twantahusbandcoulddowithoutone“Ihaveachimneythatsmokes,aparrotthatswears,andacatthatstaysoutallnight.WhatdoIneedahusbandfor?”Akerlof-YellinExplanationInmywords,nottheirsInaworldwithoutabortionorcontraception,sexandbabiesarejointproductsProduceoneand,probabilistically,yougettheotherRearingababywithoutahusbandtosharetheloadishardSomostwomeninsistedonmarriageorengagementasaconditionofsexAndcouldgetthatdealbecausemostmenhadnogoodalternativesourceofsexWithreliablecontraceptionandlegalabortion,thelinkisbrokenWomenwhodon’twantbabiesbutwantsexcanofferitwithouttheconditionAndtheircompetitionmeanssomewomenwhowantbothcan’tgetitSoenduphavingbabiesandrearingthemwithoutamantohelpThisassumesthat,ontraditionalterms,menarerelativelymoreinterestedinmarriageforsex,womeninmarriageforbabiesThisistheoppositeofthepredictedeffectofthechangeOut-of-wedlockchildrenwereassumedtobeunwantedchildren:AccidentsCausePeopleWithreliablecontraceptionandabortionavailabletherewouldn’tbeanyApparentlytheyweren’tunwantedButwhydidn’tthepatternappearfirstattheupperendoftheincomescale?ExplainingSexLawAgainstadultery:ContractenforcementEspeciallyagainstfemaleadultery—thedoublestandardMendon’tgetpregnant,andmenwanttoreartheirownchildrenMaleadulterycandivertresourcesawayfromthewifeForboth,alinkbetweensexualexclusivenessandemotionalcommitmentAfamilyisacommuneAndwhatcommunismneedstoworkislove.AgainstfornicationAkerlof-Yellinargument:Womenwhowanttogetmarrieddon’twantcompetitionResearchonmoderncollegestudentnormssuggeststheproblemstillexistsWomenwhoarelookingforhusbandsdisapproveof,trytoshameWomenengagedincasualsexIfmarriageproducesbetterchildren,andfornicationunderminesmarriage,AndwehaveacommoninterestinaworldwithbetterpeopleinitThat’sanargumentfordiscouragingfornicationRingsandPromises:MargaretBrinigTraditionalpatternincludedsexbeforemarriagebutwithcommitmentDataondateofmarriageanddateoffirstbirthinsome19thc.citiesSuggestthatuptohalfofbrideswerepregnantThatraisestheriskofseduceandabandonTheshotgunmarriageistheusualimagefordealingwithitInAnglo-Americanlaw,breachofpromisewasactionableIneffectdamagesforlossofvirginity,whichwasvaluableonthemarriagemarketWhy?Startingabout1935,U.S.courtsincreasinglyabandonedtheactionWhichiswhywomenstartedrequiringvaluableengagementringsThinkofitasaperformancebond–ifhejiltshershekeepstheringDiamondsalesgoupaboutwhencourtsstartabandoningtheactionSalesfallmuchlater,presumablybecausevirginityisnolongconsideredimportantSeductionLaw:OldandOlderFatherswanttocontrolwhotheirdaughters’marryInAnglo-Americancommonlaw,onewayofdoingitWasanactionagainstaseducerbythefatherOnthegroundsthathewasdeprivedoftheservicesofaservantConventionalexplanationofwhyhehadtodoitthatway:Thedaughtercouldn’tsuefordamages,becausefornicationwasillegalHenceshewasaparticipantinthecrime.”Uncleanhands”Myexplanation:SeductionoftenmeansevasionofparentalcontrolHewantsmetomarryJohn,IwanttomarryBillIfBillgetsmepregnantmyfatherwillhavetoletusgetmarriedAtacticthatisexplicitatonepointinCasanova’smemoirsSothefatherwantsalegalactionhecancontrol,notonehisdaughtercancontrolThesameissueshowsupintraditionalJewishlawUnderreligiouslaw,awomanwasadultandcouldchooseherhusbandat12?CommunalauthoritiestriedtofindwaysofaddingadditionalrequirementsGettingaroundthereligiouslawrulesinvariouswaysPrettyclearlyforthesamereasonTheAdoptionMarketIt’sanoddmarket–supplyanddemandareroutinelyoutofsynchAsonewouldexpectinamarketwithpricecontrolItisillegaltopaythenaturalmotherforherpermissiontoadoptherbabyAlthoughtherearewaysofpartlyevadingthatconstraintMostlybypayingthelawyerwhoarrangestheadoptionAdoptionagenciesclaimtoinsteadmakethechoiceinthebaby’sinterestWhataretheirincentives,comparedtothoseofnaturalandadoptiveparents?Dotheiractualrequirementssupportthatclaim?RichardPosnerwillneverbeontheSupremeCourtDespitebeingseniorjudgeofthe7thCircuitAndoneofthemostdistinguishedlivinglegalscholarsBecausehecameoutinfavorof“sellingbabies.”Myonlyfirsthandexperienceiswithadopting(ornot)kittensWhichraisesthesameissuesOnasmallerscaleTheCom