Category Archives: New Research

Does Contract Law Need Morality? The Slave, The Digital Pedophile, and The Indebted Gambler

Wenhao Liu and I have just posted to SSRN a draft of our paper discussing Nate Oman’s book, The Dignity of Commerce.  For those of you who have not yet read the Dignity of Commerce, I highly recommend it. I adopted it for my Advanced Contracts seminar last year and have done the same for this year. The book might also be a useful addition to a first-year contracts course, depending on your coverage, but it definitely works well for me in the more advanced setting.

In brief, The Dignity of Commerce sets out an ambitious market theory of contract, which Nate argues is a superior normative foundation for contract law than either the moralist or economic justifications that currently dominate contract theory. One of the book’s most important contributions is its emphasis on the positive role played by markets and thus, by extension, of contracts. In an era rife with warnings about the market’s dangers to society, Nate’s cogent reminder of the market’s benefits is both refreshing and welcome. I was particularly drawn to the discussion of the market’s (and, therefore, contract’s) often forgotten role in organizing productive social interactions. These social benefits, Nate argues, are so important that it is these benefits—rather than a commitment to markets in and of themselves—that justify the use of state resources to support markets, and thus contracts.

Nate’s theory is also descriptively appealing: by recognizing that conceptions of morality and blameworthiness impact contract law, The Dignity of Commerce surely provides a descriptively more realistic account of contract law than theories that contend that contract law is explained solely by economic considerations or solely by moral ones. We find Nate’s market theory of contract less successful as a normative or prescriptive theory, however. To our mind, Nate makes moral judgments about the validity of certain markets (and, therefore, certain contracts) without providing a theoretical framework to replace either the moralist or economic theories he rejects. As a result, we don’t think the market theory can provide meaningful guidance to courts, policymakers, or scholars confronted with the more difficult questions facing contract law.

We illustrate all of these points using the examples of forced slavery, “The Digital Pedophile,” “The Indebted Gambler,” and taboo (or pernicious) markets, such as commercial surrogacy and sex work. And, hey, what could be more fun than that?!

So, all in all, The Dignity of Commerce is definitely a worthwhile read and can easily be incorporated into contract law courses and seminars, especially if you try to spend some time asking students to think about the normative foundations of contract law and how courts should resolve some of the thornier questions that emerge.

And, of course, you should make sure to read our critique of the book, as well!

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Gordon and Hedlund On Financial Aid And Rising College Tuition

Over at Marginal Revolution, Alex Tabarrok discusses a new NBER paper, Accounting for the Rise in College Tuition, by Grey Gordon and Aaron Hedlund:

Grey Gordon and Aaron Hedlund create a sophisticated model of the college market and find that a large fraction of the increase in tuition can be explained by increases in subsidies.

With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.

These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition. Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state….Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.

Read the whole post, along with some caveats on the results, here. And the full paper here.

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Defending Nuance (or, just fuck it. Seriously.)

Contract law scholars may be interested in a new paper, The Relational Economics of Commercial Contract, recently posted to SSRN by Chapin Cimino of Drexel Law School:

Abstract:

For almost half a century, the mainstream law-and-economics movement in contract law has zealously protected the parsimony – or simplicity – of economic analysis. The faith in ever-increasing formality is captured both by stubbornly spare assumptions about human behavior and tightly controlled econometric modeling. With few exceptions, the trend in most mainstream contract law scholarship – where the law-and-economic approach is dominant – has been toward excluding, not including, any variable which would capture the realities of actual contracting behavior. This trend has fueled the rise of neo-formalism in both contract theory and doctrine to the exclusion of other accounts.

At the same time, however, economic empiricists in other disciplines have been capitalizing on insights from sociology – insights almost as old as the law-and-economics movement itself – showing not only that, but also how, commercial actors in contemporary transactions rely on cooperative social behaviors common in everyday contracting. These behaviors, called relational norms, were originally identified by law-and-sociology professor Ian MacNeil as part of what is now called relational contract theory. Since the early 1990’s, economics scholars working mostly in the fields of marketing and strategic management have included relational norms as key variables in transaction cost analysis research. Strangely, though this work has clear implications for contract law and theory, this work has yet to be discussed in contract law literature. This article breaks new ground by introducing that work in contract law scholarship. The article shows how, contrary to received wisdom in law-and-economics, including relational behaviors in transaction cost research can improve, not detract from, the predictive power of economic analysis.

I think Cimino oversimplifies both the modern law and economics approach to contract as well as the reasons for some of its adherents’ attachment to formalism. For example, Cimino argues in the paper that:

For the past half-century, law and economics has played the dominant role in contracts scholarship. Scholars in this tradition value the prediction of behavior based on a cost-benefit analysis over the ability to precisely describe the world in which that behavior occurs.

Of course, that describes some contract scholarship in the law & econ tradition, but far from all of it, and even scholars making simplifying assumptions for the sake of modeling often have valid reasons for those assumptions – for example, to highlight and provide insights into a particular aspect of contracting behavior. And my own sense is that some of the law and economics scholars cited in the paper favor formalist approaches, not out of a vague attachment to simple predictive models, but because they believe it will lead to the most favorable results under real-world relational contracting conditions (such as sophisticated repeat players and informationally disadvantaged courts).

Nonetheless, the paper discusses in detail literature of which many contracts scholars may be unaware and argues for its relevance to current contract law debates, so be sure to read the whole thing here.

Interestingly, the call to turn to the nuance of sociology rather than to the simplicity of economics comes at a time when at least some sociologists are urging the opposite result. In Fuck Nuance, my co-author (on, coincidentally, a contract law paper), the sociologist Kieran Healy argues that:

Nuance is not a virtue of good sociological theory. Sociologists typically use it as a term of praise, and almost without exception when nuance is mentioned it is because someone is asking for more of it. I shall argue that, for the problems facing Sociology at present, demanding more nuance typically obstructs the development of theory that is intellectually interesting, empirically generative, or practically successful.

. . .

To take the most obvious example, it is traditional in Sociology to deride the way Economists work, depending as they do on an extremely pared-down model of human action. There is no less nuanced a character than Homo Economicus. While it is easy to snipe at theory on this basis, the strategy of assuming a can opener (as the old desert-island joke goes) turns out to be an unreasonably effective way of generating some powerful ideas.

But, of course, the best part of the paper is the abstract, which reads in its entirety: “Abstract: Seriously, fuck it.”

Clearly, the law professoriate needs to borrow from sociology its brevity and humor, if not its nuance.

My understanding is that the paper was a big hit at the 2015 American Sociological Association Meetings.

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