Collapsing Illusions: Standards for Setting Efficient Contract and Other Defaults
18 Pages Posted: 25 Mar 2016
Date Written: March 4, 2016
Abstract
In this Essay, Professor Burton analyzes and evaluates four commonly used standards for setting efficient default rules and standards. Based on two theoretical insights, he shows that three of them collapse upon analysis into the fourth, a Coasian standard that turns out to be a dead end. The theoretical upshot is that the Coase Theorem often is a good reason to use defaults rather than mandatory rules or standards. But neither the theorem nor reference to a transaction-costless world sustains particular defaults. To set an efficient default, the law should guide courts toward supplying terms that parties should have adopted to generate a surplus from the term or a cluster of related clauses.
Keywords: contracts, contract theory, default rules, law and economics, corporations, economics
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