Default Rules, Wealth Distribution, and Corporate Law Reform: Employment at Will Versus Job Security

Abstract

In recent years, concerns about the costs to nonshareholders of corporate law's shareholder primacy regime have prompted a variety of law reform proposals. My article begins with analysis and critique of so-called communitarian proposals but nevertheless rejects the contractarians' insistence that nonshareholders should rely entirely on self-protection through contract. The basis for my position is the fact that wealth constraints inevitably limit the ability of many nonshareholders to bargain and pay for adequate safeguards. For example, lower-level employees might value job security but, for practical reasons, be unable to accept lower wages to pay for it. My proposal retains a commitment to private ordering but suggests that changes in existing contractual default rules might improve bargaining outcomes for nonshareholders. (I focus on employees and the current at-will default rule.) The analysis draws on recent economic research indicating that people value entitlements more highly if they own them than if they do not. Even though default rules do not themselves confer entitlements, beneficiaries of default rules seem to behave as if they do. Changing the default rule from employment at-will to job security therefore could increase employees' bargaining leverage and allow them to capture a larger share of gains from trade in employment contracting, regardless of whether contracts end up including at-will or job security terms. The final section of the article addresses the argument for retaining the at-will default rule on the ground that employment at-will is more efficient than job security. Because the primary argument in favor of at-will's superior efficiency is its pervasiveness in contracting practice, I rely on recent research on path dependency to respond that pervasiveness does not necessarily indicate superiority. The asserted efficiency of the at-will default rule therefore does not provide a sufficient reason to reject the potential distributive benefits of a job security default.