• Selected
• Entire List

Abstract:
Electronic commerce offers the promise of facilitating transactions, especially low-value transaction, between distant parties. These transactions, however, are not readily susceptible to the legal enforcement mechanisms that are typically assumed necessary to generate a successful system of commercial transactions. Enforcement costs related to long-distance, low-value transactions suggest that parties will forgo otherwise value-enhancing transactions unless they can find some substitute for ex post legal redress. In theory, a reputation for contractual performance can fill this gap. But the creation and transmission of reputational information is itself costly. The history of commercial transactions suggests that reputational intermediaries can reduce these costs. This paper explores the possibilities and limits of using such intermediaries in electronic commerce by investigating the efforts by eBay, the online auction site, to create a reliable base of information for and about its members. The paper concludes that eBay's mechanism, while valuable, may suffer from biases that limit the utility of the reputational information it provides. The paper examines possible changes in legal rules that could, in theory, improve the quality of information in electronic commerce.

Internet, reputation

Abstract:
Recent scholarship in commercial law has considered whether ambiguities of contractual language and contractual gaps are best resolved through a "plain meaning" rule or a strategy that incorporates trade custom. The debate is difficult to resolve by asking which strategy minimizes total contracting costs, because different strategies reduce different elements of those costs. In this brief essay, written for a conference on The Empirical and Theoretical Underpinnings of the Law Merchant, I suggest a taxonomy of the conditions under which trade usages would be sufficiently precise, observable, and verifiable as to warrant their incorporation. I apply the conclusions from that analysis to an area that doctrinal law, counterintuitively, implies is appropriate for the application of the incorporation strategy - international sales transactions governed by the UN Convention on Contracts for the International Sale of Goods, or CISG. The complexity of international sales and diversity of transactors suggests that this is a peculiar arena for the incorporation strategy. Nevertheless, I conclude that the conditions for adoption of trade usages under the CISG are surprisingly ripe, and, as currently applied by courts, the incorporation strategy does not generate the substantial costs attributed to it. I suggest that this occurs, in large part, because adjudicators have tended to entertain claims of custom only where the alleged trade usage conditions on variables that are both observable and verifiable.

Abstract:
The United Nations Convention on Contracts for the International Sale of Goods, or CISG, has been adopted by more than 60 countries in an effort to harmonize the law that applies to international sales contracts. In this paper, we argue that the effort to create uniform international sales law (ISL) fails to supply contracting parties with the default terms they prefer, thus violating the normative criterion that justifies the law-making process for commercial actors in the first instance. Our argument rests on three claims. First, we contend that the process by which uniform ISL is drafted will dictate the form that many provisions take. Second, we contend that the legal form dictated by the drafting process has significant substantive consequences, particularly for the policy objectives of uniform ISL. That leads to our third claim. We predict that in order to achieve uniform ISL that is widely adopted, those involved in the drafting process will systematically promulgate many vague standards that contracting parties would not choose for themselves. These defaults cannot be justified as the inevitable cost of achieving an optimal level of uniformity. If the products of a uniform ISL are default terms that parties do not want, then the underlying justification for the law-making function - reduction of contracting costs - vanishes.

We find significant correspondence between our predictions about the drafting of uniform international sales law and the CISG. The CISG was drafted by parties whose objectives did not necessarily coincide with those of the commercial actors whose conduct the treaty was intended to regulate. The result is a variety of vague standards and compromises that appear inconsistent with commercial interests. We also illustrate the ways in which the CISG avoided potential correctives to these problems. We conclude by suggesting that commercial actors involved in international sales would prefer to choose governing law from among legal regimes that compete to supply parties with more desirable substantive terms.

Abstract:
Rolling contracts involve terms that sellers include with delivery of goods and that purport to affect the rights of the parties to a contract. They have become common in contracts concluded in telephone or on-line transactions, and controversial because buyers often do not explicitly assent to them and are highly unlikely even to read them. In this article, I suggest that it is appropriate to evaluate the effectiveness of rolling terms, and of standard form contracts generally, as a principal-agent problem. When buyers do not represent themselves in the process of drafting a contract, their interests may still be internalized by sellers in competitive markets, by courts that adjudicate the terms that the contract drafter selected, or by government agencies that mandate or prohibit certain contract terms. I suggest that the best agent for nonreading buyers is likely to vary for different clauses. In some, but not all situations, sellers have incentives to include terms that serve buyer interests. In other situations, sellers may insert clauses that appear to serve seller interests, but sellers may invoke their rights under those clauses only when it is likely that buyers are acting exploitatively. Sellers who use clauses to avoid such observable, but nonverifiable acts of buyer misbehavior may actually serve the interests of the majority of buyers. Sellers will not have incentives to consider buyer interests with respect to other clauses, however. In those cases, courts or agencies may be superior surrogates for buyers. Nevertheless, courts and agencies suffer from their own biases, so that the legal rules that they impose will not necessarily reflect the interests of buyers at large. Thus, rather than approve or condemn the practice of rolling contracts generally, the proper analysis requires a nuanced view that identifies when market mechanisms are likely to internalize the interests of nonreading buyers and when legal actors can better fulfill that role.

contracts, agency

Abstract:
The phenomenon of law professors changing jobs from one law school faculty to another - faculty free agency - has increased in recent years and appears to be part of a general phenomenon of increased mobility across academia. In this paper, I consider the consequences of free agency in law school markets. It is likely that law professors have benefited financially from free agency. Whether it has benefited law schools generally, or advanced the quality of legal education is another matter. The paper raises some issues that at least give reason for pause about free agency. The consequences of free agency have been similarly questioned in other industries, most notably professional sports. But studies suggest that the adverse effects that some predicted when free agency was officially instituted there have not materialized. Thus, in the absence of similar studies about academic free agents, one might claim that my concerns are overstated. But those studies are often most interesting because they focus on characteristics of professional sports that have little or no analogue in faculty markets. The market for professional sports differs from the academic market in ways that I suggest have significant effects on free agency. Academic free agency may have different, and more negative, impact in academia. To the extent that is true, law schools face a classic prisoners' dilemma in adjusting. Even if it would benefit legal education generally to constrain free agency, it is contrary to the interests of any law school to constrain itself unless competitors do the same. I conclude, therefore, with some practical ideas about how to address the negative effects of free agency.

Law Schools, Faculty, Mobility, Free Agency

Abstract:
The literature on standard form contracts has increased dramatically in recent years, as lawyers and economists have debated their desirability in both business and consumer settings. The development of novel forms of contracting, such as telephonic and Internet-based contracting, as well as the application of interdisciplinary approaches to legal issues have raised questions concerning the meaning of assent to terms that are presented with little practical opportunity for negotiation. Many of the arguments for or against the enforcement of standard form contracts rely on assumptions concerning the extent to which some buyers can serve as surrogates for others and the presence or absence in standard forms of terms that reflect what would emerge in a competitive environment. Recently, some empirical literature has appeared on these questions as well. Finally, some commentators have suggested additional administrative regulation of contracts to reduce exploitation of those presented with unalterable standard forms. This review of the literature, prepared for the forthcoming Encyclopedia of Law and Economics (2d edition), discusses the current state of the theoretical and empirical literature on these issues.

contracts, standard form contracts

Abstract:
The constitutions of numerous states require municipalities to obtain electoral approval prior to issuing debt. When the electorate rejects debt proposals, however, officials may proceed with the proposed project through an alternative financing mechanism that does not require a vote. There are two sets of competing explanations for this phenomenon. The first, benign, explanations suggest either that the alternative forms of financing do not implicate the concerns that underlie debt election requirements, or that those who vote in bond elections do not represent residents' preferences. Thus, circumvention of bond election results by local officials does not contravene the interests of the community. If that is the case, then bond election requirements may be superfluous or harmful. The second, more malign, explanations suggest that local officials who pursue rejected projects seek to avoid constraints on agenda-setting authority, or to serve limited interests that do not reflect the general welfare of the municipality. If that is the case, then election requirements may reduce agency costs and should arguably be extended to alternative financing mechanisms that are currently excluded. While it is difficult to determine which of these effects dominates, I speculate that the Ultimatum Game structure of bond elections may generate a result that approximates an optimal level of debt for municipalities.

referendum, debt, debt election

Abstract:
The recent growth of living wage ordinances in municipalities poses a fascinating theoretical and legal puzzle. Traditional theories of urban finance suggest that local governments cannot effectively engage in redistribution, because potential residents and firms will simply migrate to less redistributive localities. Yet these ordinances are explicitly redistributive. Moreover, living wage ordinances are not alone. Increasingly, local governments are involved in redistribution, from imposing living wage requirements to subsidizing firms. There are two plausible explanations for this phenomenon. The first is that the conventional wisdom about local redistribution requires modification - local governments can effectively enact redistributive legislation because redistribution has limited geographical benefits that localities can exploit. The second explanation is more cynical - local legislation is enacted at the behest of local interest groups who can gain benefits from the legislation, notwithstanding deleterious effects to the locality overall.

In this Article, I use the current debates about living wages as a microcosm for discussion of the larger issue of local redistribution. I consider both the benign and malign explanations for living wage ordinances and local redistribution generally, and then turn to the capacity of courts to distinguish when each explanation exists. This leads into a general discussion about the extent to which state constitutional law authorizes judicial intervention into legislative processes. Even if state courts have constitutional authority to intervene in legislative processes, however, I suggest that the judiciary has limited institutional competence to distinguish the malign from the benign redistributive program and address the implications of those limitations.

redistribution, state constitution, judicial review, local government

Abstract:
Local governments often enjoy "home rule," in the sense that they are able to initiate legislation concerning municipal affairs without obtaining the prior consent of the state legislature. At the same time, these localities often are able to exercise limited discretion over revenue raising. In theory, at least, the inability to raise funds constrains the exercise of substantive home rule authority. Moreover, the specific restrictions that states often impose on municipalities instantiates a particular, non-redistributive view of local government and, by restricting the set of fiscal tools that are available to the locality, arguably causes deviations from an ideal market for residence. This Article discusses the constraints that localities often face with respect to imposing taxes on residents and issuing debt to pay for capital projects. While there are plausible explanations for these limitations, restrictions on fiscal home rule must ultimately be weighed against the distortions that they cause when localities seek to circumvent them. Reliance on market mechanisms to select a locality's taxing and debt structure may produce superior results.

home rule, local government, interlocal competition, Tiebout

Abstract:
This essay draws on historical and current examples to examine the extent to which public creditors can enhance democracy by monitoring public officials in a manner that compansates for the failures of the government-debtor's constituents to monitor public officials. Creditors and constituents may share significant interests, depending on the structure of security arrangements for public debt and the identity of the debtors. Where interests overlap, the capacity of creditors to overcome collective action problems suffered by constituents may transform creditors into surrogates for constituents. Whether creditors are willing to play this role, however, may depend on the existence of alternatives to creditor monitoring, such as diversification and market constraints on default. The essay concludes with an examination of the plausible scope of creditor monitoring in contemporary settings of sovereign and state and local debt.

public debt, monitoring, democracy

Abstract:
Theories of fiscal federalism and urban economics suggest that only relatively centralized levels of government can successfully implement redistributive policies. Nevertheless, local redistributive programs that direct resources to both the wealthy and the poor are ubiquitous. In this paper, I suggest why localities might adopt such programs. I argue that there are multiple plausible reasons for publicly interested local officials to engage in significant redistributive spending. At the same time, I recognize that the very characteristics of municipalities that make local redistribution possible also provide opportunities for its abuse. I suggest that, ideally, judicial analysis of the scope of local autonomy could distinguish between benign and malign redistributive programs, but that the capacity of courts to make those distinctions in practice is significantly limited. In this regard, I suggest and evaluate a variety of proxies that courts could plausibly utilize to discern the presence of "malign" redistribution, that is, redistributive programs that advance private rather than public interests. I conclude, however, that these proxies are unlikely to be of much assistance, except in pathological cases where there exist multiple indicia of private interest. Finally, I suggest that even in those rare cases in which the judiciary might accurately recognize improper local redistribution, issues of institutional competence should limit judicial intervention.

Abstract:
Numerous commentators on local government law have advocated some form of regionalization to address metropolitan problems. These recommendations emanate from a conception of local governments, particularly suburbs, as isolated, self-interested entities that ignore or exploit the plight of their neighbors, particularly central cities. In this Article, Professor Gillette posits both a justification for decentralized entities and a more sanguine relationship among localities within a region. Analogizing from the literature concerning firms that form long-term contractual relationships, he contends that neighboring localities may be sufficiently interdependent that they have significant incentives to cooperate through interlocal contracts that realize economies of scale or that share regional distributional burdens. He suggests that any underutilization of interlocal contract depends less on suburban disinterest or exploitation than on contracting costs and legal obstacles that do not as readily affect interfirm relationships. Thus, problems attributed by advocates of regionalization to excessive localism may best be redressed through institutional arrangements that reduce contracting costs. Nevertheless, he argues that some costs inherent in regional burden-sharing contracts, such as the observability and verifiability of contract breaches, may be irreducible. He concludes, therefore, that some contracting costs that are endemic in interlocal relations are best circumvented through informal cooperative bargains that avoid problems of monitoring and enforcement.

Abstract:
This paper comments on Ronald Mann's article "The Role of Letters of Credit Transactions." In that article, Mann contends that, contrary to traditional understandings, the function of the letter of credit is to solve informational asymmetries by allowing an issuer with superior information to verify a buyer's legitimacy to the distant seller or to the buyer's government. He contends that traditional understandings of letters of credit are inconsistent with practice, particularly the systematic honor of drafts presented with discrepant documents. In this paper, I raise various issues that contest Mann's claim. First, there exist explanations for the honor of discrepant documents that are consistent with traditional understandings of documentary transactions. For instance, presentment of discrepant documents does not indicate defects in the underlying transaction, and banks have incentives to honor drafts unless they are aware of such defects. Second, Mann's suggestion that issuers signal the creditworthiness of their customers has little explanatory power, since, once the credit is issued, the beneficiary looks to the issuer for payment and thus is indifferent as to the customer's reliability. Third, any signal concerning the customer's creditworthiness that emerges from issuance of the credit is relatively opaque and could be replaced at lower cost by more precise indicators of reliability. Finally, Mann's suggestion that issuers of credits solve an informational problem among diffuse and geographically distant commercial parties ignores the likelihood that the same collective action problem that precludes communication about buyers also precludes communication about the reliability of different banks. The paper concludes with remarks about the need for careful rather than casual empiricism and the utility of relying on bank officials alone to determine the proper role of letters of credit.

Abstract:
When a government contracts with a private firm to supply a service previously supplied by the government, questions arise as to whether the private firm benefits from immunities that previously applied to government actors. In Richardson v. McKnight, the Supreme Court held that the employees of a private prison operator did not enjoy the immunity from section 1983 liability that normally is available to government actors. The Court recognized that resolution of this issue invokes assumptions about the incentives government and private firms face when supplying a particular service, but did not pursue the implications of the incentives that it assumed did apply, and failed to distinguish assumptions it had embraced in an earlier privatization case. We recognize that the privatization of governmental functions rests on contractual arrangements between governments and firms. We thus explore the consequences of different assumptions about what motivates the government actors who draft the terms of contracts for firms to supply public goods. Across a wide range of situations, and under different assumptions about motivation, these contracts are likely to provide for immunity. Nevertheless, we conclude that, under certain assumptions about the motivations of government actors, it would be appropriate to enforce a liability default rule. Such a rule may force government actors and the firms with which they contract to supply to the general public information that the contracting parties would otherwise keep private and that would generate inefficient contract terms.

Abstract:
The traditional story of custom in commercial law suggests that repeated practices within a trade or industry can become an efficient source of majoritarian default rules and therefore augment positive law. Perhaps for this reason, custom has become integrated into both domestic and international law concerning the sale of goods. The underlying assumption is that custom will evolve in a manner that reflects optimal trade practices. The integration of custom into legal principles, however, has been critiqued from two sources. The first suggests that judicial construction will necessarily misconstrue the content of custom, rendering it less helpful, especially in international sales contracts where cultural differences frustrate judicial attempts to discern the content of a trade usage. The second critique arises from recent literature that suggests how standards analogous to custom suffer from lock-in effects that impede efficient evolution. In this article, I suggest that the threat of judicial misconstruction, while real, is overstated. I then suggest that stasis, or lock-in, may be a more serious problem, especially if one views custom as a convention to which actors have significant incentives to adhere. Nevertheless, as in the case of judicial misconstruction, I suggest that the case for stasis may be overstated, as many customs arise through mechanisms that include devices to avoid lock-in. For instance, many customs in international sales law are maintained through organizations that can internalize the benefits of transition in customs. Indeed, they may enjoy incentives to promote change. I conclude, however, that the situations in which transition can occur do not necessarily entail desirable or efficient transitions. Thus, whether a particular custom reflects efficient trade practices requires a more nuanced response than much of the literature has recognized.