Harnessing the Positive Power of Rankings: A Response to Posner and Sunstein

Symposium: The Next Generation of Law School Rankings held April 15, 2005 at Indiana University School of Law-Bloomington

Bounded Rationality, Standard Form Contracts, and Unconscionability

Economic theory suggests that, in most circumstances, market forces will ensure that standard form contracts contain terms that are not only socially efficient but also beneficial to non-drafting parties as a class compared to other possible combinations of price and terms. This analysis in turn suggests that courts should enforce all form terms or, at a minimum, all form terms that non-drafting parties read and understand. Relying on social science research on decisionmaking, this Article argues that non-drafting parties (usually buyers) are boundedly rational decisionmakers who will normally price only a limited number of product attributes as part of their purchase decision. When contract terms are not among these attributes, drafting parties will have a market incentive to include terms in their standard forms that favor themselves, whether or not such terms are efficient. Thus, there is no a priori reason to assume form contract terms will be efficient. The Article then argues that the proper policy response to this conclusion is greater use of mandatory contract terms and judicial modification of the unconscionability doctrine to better respond to the primary cause of contractual inefficiency

Psychological Impediments to Mediation Success: Theory and Practice

Published in cooperation with the American Bar Association Section of Dispute Resolutio

Inertia and Preference in Contract Negotiation: The Psychological Power of Default Rules and Form Terms

In The Problem of Social Cost,\u27 the foundational article of the law and economics movement, Ronald Coase suggested that when transaction costs are zero, the initial allocation of a legal entitlement is irrelevant to its eventual ownership. Assuming no transaction costs, the Coase Theorem predicts that if party A values an entitlement more than does party B, A will keep the entitlement if it is initially allocated to him, and he will buy it if it is originally allocated to B. This powerful insight depends on the behavioral assumption that an individual\u27s valuation of entitlements does not depend on ownership; that is, A values an entitlement neither more nor less if he is initially allocated that entitlement than if it is initially given to B. The assumption that preferences are exogenous to entitlement allocations is empirically testable, however, and has been demonstrated to be false, at least under some conditions. The empirical evidence, labeled alternatively the status quo bias, the endowment effect, or the offer/asking price gap, instead suggests that the initial allocation of legal entitlements can affect preferences for those entitlements. The consequence is that completely alienable legal entitlements will be sticky -that is, tend not to be traded-even when such stickiness cannot be explained by transaction costs. The evidence thus describes an important flaw in the Coase Theorem\u27s mighty armor. The principle goal of one branch of the discipline of behavioral law and economics or law and behavioral science s is to explore the legal implications of this flaw. In a previous article, I argued that contracting parties are less likely to bargain around background-or default --contract terms established by the law than the Coase Theorem would predict because the parties are likely to view default terms as a constituent part of the status quo, much like an entitlement. The claim, if correct, has both positive and normative implications for the analysis of contract default rules. On the positive side, it leads to predictions that differ from traditional law and economics analysis regarding what circumstances are necessary for contracting parties to bargain around default rules. On the normative side, it suggests somewhat different strategies (again, compared to traditional law and economics analysis) for lawmakers interested in selecting contract default rules that will enable private bargainers to maximize allocative efficiency