A Theory of Mandatory Rules: Typology, Policy, and Design

Abstract

Market regulation has traditionally focused on disclosure duties, and in recent years much attention has been given to nudges. However, there are increasing doubts about the effectiveness of disclosures and nudges. In response, some conclude that regulation should be abandoned altogether. An alternative conclusion is that there is a need for more serious and systematic consideration of the use of mandatory regulation of the content of transactions. This Article focuses on such measures.

While much has been written about the design of default rules, disclosures, and nudges, relatively little scholarly attention has been given to the questions of when to deploy and how to design mandatory rules. To fill this gap, the Article first offers a typology of procedural and substantive mandatory rules, maps the arguments for and against the use of mandatory rules, and describes their current use. Next, the Article offers a systematic analysis of ten choices involved in the design of mandatory rules, concerning who imposes the mandate, the scope of mandate, the possible interaction with procedural mandatory rule, and the enforcement of the mandate. This discussion yields new insights. Among other things, once it is realized that the choice is not dichotomous—i.e. substantive mandatory rules, yes or no—but rather covers a huge variety of such rules which differ in numerous respects, blanket opposition to mandatory rules ceases to be tenable. Thus, the inquiry into the question of how to regulate the content of transactions sheds new light on the question of whether to do so.

Keywords: contract law, mandatory rules, disclosure duties, nudges, market failures, regulation, framing, paternalism

JEL Classification: D03, D11, D18, D6, D82, K12, K2