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Abstract:
During contractual negotiations, parties often make (reliance) expenditures that would increase the surplus should a contract be made. This paper analyzes decisions to invest in pre-contractual reliance under alternative legal regimes. Investments in reliance will be socially suboptimal in the absence of any pre-contractual liability -- and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how 'intermediate' liability rules could be best designed to induce efficient reliance decisions. One of our results indicates that the case for liability is shown to be stronger when a party retracts from terms that it has proposed or from preliminary understandings reached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that pre-contractual liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations.

Abstract:
During contractual negotiation, parties often make (reliance) expenditures that would increase the surplus should a contract be made. This paper analyzes decisions to invest in pre-contractual reliance under alternative legal regimes. Investments in reliance will be socially suboptimal in the absence of any pre-contractual liability - and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how "intermediate" liability rules could be best designed to induce efficient reliance decisions. One of our results indicates that the case for liability is shown to be stronger when a party retracts from terms that it has proposed or from preliminary understandings reached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that pre-contractual liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations.

Contracts, bargaining, negotiations, reliance

Abstract:
During contractual negotiations, but before entering a contract, parties might make (reliance) expenditures that would increase the surplus should a contract be made but would be fully or partially wasted otherwise. This paper develops a model for analyzing parties' decisions to invest in pre-contractual reliance under alternative legal regimes. Whereas parties' investments in reliance will be socially suboptimal in the absence of any pre-contractual liability, they will be socially excessive under a regime of strict liability for all reliance expenditures. Given the results for the two polar cases, the analysis explores how "intermediate" liability rules could be designed to induce optimal reliance decisions, considers what information courts would need to implement such rules, and discusses implications for the doctrines governing pre-contractual liability. The case for liability is shown to be stronger when a party retracts from a preliminary understanding or from terms that it has proposed. Finally, the analysis shows that pre-contractual liability does not necessarily have an adverse overall effect on parties' decisions to enter into contractual negotiations.

Contracts, Negotiations, Reliance

Abstract:
This Essay explores an alternative to one of the pillars of contract law, that obligations arise only when there is a 'meeting of the minds' - when the parties reach consensus over the terms of the transaction. It explores a new principle of 'no-retraction', under which each party is obligated to terms it proposed, even if different from the terms proposed by the other, and can retract only with some liability. In contrast to the all-or-nothing nature of the meeting-of-the-minds regime, where preliminary forms of consent are either full-blown contracts or create no obligation, under the no-retraction regime obligations emerge gradually and in continuous fashion, as the positions of the negotiating parties draw closer and the magnitude of their understanding increases. The analysis shows that the no-retraction liability regime can be coupled with different damage measures, to advance various social goals, including optimal reliance. It then explores various prominent doctrines and cases in the law of assent and contract formation, which produced a puzzling and inconsistent jurisprudence, and demonstrates how these issues would be resolved in a simple and unified fashion under the no-retraction approach. Finally, the analysis provides a fresh understanding of the obligation to negotiate in good faith, and explores a new criterion for gap filling in incomplete contracts.

Abstract:
The ideal of individual liberty and autonomy requires that society provide relief against coercion. In the law, this requirement is often translated into rules that operate post-coercion to undo the legal consequences of acts and promises extracted under duress. This Article argues that these ex-post anti-duress measures, rather than helping the coerced party, might in fact hurt her. When coercion is credible - when a credible threat to inflict an even worse outcome underlies the surrender of the coerced party - ex post relief will only induce the strong party to execute the threatened outcome, to the detriment of the coerced party. Anti-duress relief can be helpful to the coerced party only when the threat that led to her surrender was not credible, or when the making of threats can be deterred in the first place. The credibility methodology developed in this Article, descriptive in nature, is shown to be a prerequisite (or an important complement) to any normative theory of coercion. The Article explores the implications of credible coercion analysis for existing philosophical conceptions of coercion, and applies its lessons in different legal contexts, ranging from contractual duress and unconscionability to plea bargains and bankruptcy.

Abstract:
This Article develops a new standard for gap filling in incomplete contracts. It focuses on an important class of situations in which parties leave their agreement deliberately incomplete, with the intent to further negotiate and resolve the remaining issues. In these situations, neither the traditional no-enforcement result nor the usual gap filling approaches accord with the parties' partial consent. Instead, the Article develops the concept of pro-defendant gap-fillers, under which each party is granted an option to enforce the transaction supplemented with terms most favorable (within reason) to the other party. A deliberately incomplete contract with pro-defendant gap fillers transforms into two complete contracts, each favorable to a different party, with each party entitled to enforce only the contract favorable to her opponent. Under this approach, partial consent gives rise to a correspondingly intermediate burden of liability. The Article demonstrates that this regime promotes the interests of negotiating parties who enter agreements-to-agree. It also identifies various doctrinal practices that already incorporate the pro-defendant gap filling logic.

Abstract:
The nature and likelihood of harms associated with products may be revealed over time. As more information is gathered, a manufacturer must decide whether to continue selling the product as is, or to recall it. The paper shows that existing products liability law gives the manufacturers bad incentive to recall products. It shows, counter-intuitively, that as the post-recall liability becomes more severe, manufacturers would be more likely to leave products in the market longer and more often than is socially desirable. It also demonstrates that the law hurts the incentives of manufacturers to acquire better information about the riskiness of products already in use. The paper discusses several ways in which liability can be designed in a way that would produce more efficient recall and safety-research decisions, to the benefit of society in general and of consumers in particular.

Law, Economics, Torts

Abstract:
How can a prosecutor, who has only limited resources, credibly threaten so many defendants with costly and risky trials and extract plea bargains involving harsh sentences? Had defendants refused to settle, many of them would not have been charged or would have escaped with lenient sanctions. But such collective stonewalling requires coordination among defendants, which is difficult if not impossible to attain. Moreover, the prosecutor, by strategically timing and targeting her plea offers, can create conflicts of interest among defendants, frustrating any attempt at coordination. The substantial bargaining power of the resource-constrained prosecutor is therefore the product of the collective action problem that plagues defendants. This conclusion suggests that, despite the common view to the contrary, the institution of plea bargains may not improve the well-being of defendants. Absent the plea bargain option, many defendants would not have been charged in the first place. Thus, we can no longer count on the fact that plea bargains are entered voluntarily to argue that they are desirable for all parties involved.

plea bargain

Abstract:
When circumstances surrounding the contract change, a party might consider breach a more attractive option than performance. Threatening breach, this party may induce the other party to modify the original agreement. The contract law doctrine of modification determines whether and when these modifications are enforceable. To promote social welfare as well as the interests of the threatened party, the law should enforce modifications if and only if the modification demand is backed by a credible threat to breach. This paper argues that credibility is not a function of pecuniary interests alone. A decision to breach can be motivated also by sentiments towards the fairness of the division of the surplus between the parties. A party whose share in the surplus is reduced in an unexpected fashion might have a credible threat to breach, even if his absolute payoff from performance is still positive and greater than his payoff from breach. The paper explores the patterns by which such fairness concerns arise. Recognizing the prevalence of these concerns suggests that modifications should be enforced in a larger set of circumstances than previously perceived. Lastly, the paper offers a fresh perspective on some of the landmark cases in the law of modification and duress.

Abstract:
Standard form contracts in consumer transactions are usually not read by consumers. This "unreadness" of contracts creates opportunities for drafters to engage in unfair trade practices. Various doctrines of contracts and consumer protection law address this concern. One of the prominent solutions coming out of recent proposals for reform is to give individuals a more substantial opportunity to read the contract before manifesting assent. With the greater opportunity to read, more transactors will actually read the terms and assent to the boilerplate will be more "robust." This Essay argues that solutions that focus on providing consumers an opportunity to read are useless, and can potentially be harmful. Most likely, greater opportunity to read would not produce greater readership of contracts - not the type that can help people make informed decisions - and the purpose of this solution would not be achieved, and could have unintended consequences. Even if the compliance with the requirement of opportunity-to-read is fairly cheap (e.g., giving consumers access to the boilerplate in advance), making this a central feature of the legal regulation of standard form contracts makes little sense. The paper ends by proposing non-legal approaches to making the contract terms more transparent, by building on market devices such as ratings and labeling.

Abstract:
This paper questions, and in some contexts disproves, the validity of the efficiency justification for the comparative negligence rule - the liability regime that divides the loss between the injurer and the victim. First, it has been argued that in the presence of evidentiary uncertainty, comparative negligence is generally superior. The analysis shows that this argument is theoretically questionable. It traces the analytical flaw in this claim, and conducts numerical simulations - a form of synthetic "empirical" tests - which prove the potential superiority of other rules. The second argument in favor of the comparative negligence rule is based on its alleged superior ability to deal with asymmetric information. This paper develops a general approach to liability rules as mechanisms that harness the parties' private information - by inducing self-selection. It then shows that the argument in the literature in favor of comparative negligence, that it induces self-selection, should be interpreted as a specific example of the general approach. Moreover, using this approach, we develop two new models of liability under asymmetric information, which demonstrate how negligence-type liability rules, other than comparative negligence, can induce self-selection. These conclusions weaken the efficiency basis for current proposals to expand the reach of the "division-of-liability" principle within tort law and beyond.

Comparative Negligence, Evidentiary Uncertainty, Asymmetric Information

Abstract:
This paper questions, and in some contexts disproves, the validity of the efficiency justification for the comparative negligence rule - the liability regime that divides the loss between the injurer and the victim. First, it has been argued that in the presence of evidentiary uncertainty, comparative negligence is generally superior. The analysis shows that this argument is theoretically questionable. It traces the analytical flaw in this claim, and conducts numerical simulations - a form of synthetic "empirical" tests - which prove the potential superiority of other rules. The second argument in favor of the comparative negligence rule is based on its alleged superior ability to deal with asymmetric information. This paper develops a general approach to liability rules as mechanisms that harness the parties' private information - by inducing self-selection. It then shows that the argument in the literature in favor of comparative negligence, that it induces self-selection, should be interpreted as a specific example of the general approach. Moreover, using this approach, we develop two new models of liability under asymmetric information, which demonstrate how negligence-type liability rules, other than comparative negligence, can induce self-selection. These conclusions weaken the efficiency basis for current proposals to expand the reach of the "division-of-liability" principle within tort law and beyond.

Comparative Negligence, Evidentiary Uncertainty, Asymmetric Information

Abstract:
Several doctrines of contract law allow courts to strike down excessively one-sided terms. A large literature explored which terms should be viewed as excessive, but a related question is often ignored - what provision should replace the vacated excessive term? This paper begins by suggesting that there are three competing criteria for a replacement provision: (1) the most reasonable term; (2) a punitive term, strongly unfavorable to the overreaching party; and (3) the maximally tolerable term. The paper explores in depth the third criterion - the maximally tolerable term - under which the excessive term is reduced merely to the highest level that the law considers tolerable. This solution preserves the original bargain to maximal permissible extent, and yet brings it within the tolerable range. The paper demonstrates that this criterion, which received no prior scholarly notice, is quite prevalent in legal doctrine, and that its adoption is based on powerful conceptual and normative underpinnings.

contract law, maximally tolerable

Abstract:
This article studies the standard form contracts used by automobile manufacturers to purchase auto parts. It explores how the contracts reflect divisions of bargaining power, asymmetric information, problems of hold-up and renegotiation, and market competition. Based on interviews with representatives of buyers and suppliers, the article also describes the process of drafting the forms, the negotiation over price and other terms in the shadow of these forms, and the opportunities for non-drafters to extract improved terms. Some of the main lessons are: (i) The terms of the contracts and the bidding process prevent ex-post hold-up by suppliers (in contrast to the claims made by Benjamin Klein and others based on the GM/Fisher Body contract); (ii) There is surprisingly little ad-hoc tailoring of terms, even when such tailoring can increase the surplus from the deal; (iii) Internal organization structures are harnessed effectively to secure favorable bargaining outcomes; (iv) There is a significant variation between the standard forms utilized by the big automakers, in some of the most important aspects of the deals. This variation suggests that some of the terms are inefficient.

Abstract:
This short essay introduces the themes that are developed in twelve articles that were delivered recently in a symposium on "Boilerplate: Foundations of Market Contracts" at the University of Michigan Law School.

Abstract:
This article explores the merits of a new criterion for default rules in incomplete contracts: fill the gaps with terms that are favorable to the party with the greater bargaining power. It argues that some of the more common gaps in contracts involve purely distributive issues, such as the contract price, for which it is impossible to choose a unique, joint maximizing, "most efficient" term. Rather, the term that mimics the hypothetical bargain in these settings must be sensitive to the bargaining power of the parties - the term they would have chosen to divide the surplus in light of their relative bargaining strength. The article explores the justifications for such a bargain-mimicking principle, the ways it can be implemented by courts, and the subtle ways it is already in place.

Abstract:
This paper argues that enforcement of modifications, reached under threats to breach, should be conditioned solely on the credibility of the threat. When a credible threat exists, enforcement of the modification promotes both social welfare and the interests of the threatened party. If modifications backed by credible threats were not enforceable, the threatening party would not bother to demand a modification, and would simply breach the contract - to the detriment of the threatened party. The doctrine of duress, which predominantly controls modification cases, only hurts the "coerced" party. By denying enforcement in cases where a credible threat exists, duress doctrine preludes the threatened party from making the commitment that is necessary to avert breach. Paradoxically, it is in those circumstances where a threatened party has no alternative options nor adequate remedies that, under duress doctrine, she cannot escape breach. The analysis in this paper suggest that, in dealing with agreements reached under threats to breach, courts should replace the duress methodology with a credibility inquiry. It discusses factors that would be relevant under such inquiry. Finally, it demonstrates some of the applications of this approach in the context of leading cases.

Abstract:
Private law is replete with instances in which parties who make costly investments that benefit others are entitled to recover from the beneficiaries, even in the absence of an explicit contract. When these investments yield only a chance for benefit, the law's treatment of the right to recovery turns out to be highly inconsistent. Many types of costly actions create uncertain (probabilistic) benefits. By the time the benefit becomes known, the law has to determine whether the recovery by the investing party should depend on the ex-post benefit as it materialized, or on the ex-ante value (the average benefit or the cost of the investment). Previous scholarship has shown that either the ex-post or the ex-ante approach, appropriately tuned, can create optimal incentives. This paper argues that, in practice, courts often fail to apply either the ex-ante or the ex-post approaches, and use instead "hybrid" approaches, which distort incentives. Under one hybrid approach, the investing party can recover either the ex-post benefit enjoyed by the beneficiary, or the cost of the investment, whichever is greater. Under a second hybrid approach, the investing party can recover either the ex post benefit or the cost of the investment, whichever is lesser. The paper shows that a variety of private law doctrines incorporate these hybrid approaches, and speculates on the reasons why they emerge. It suggests that hybrid rules can emerge inadvertently, in the interface between pure ex-post and ex-ante recovery rules, or as a result of courts' imperfect information. In addition, hybrid rules can be created deliberately, to adjust the measure of recovery. The paper argues that the magnitude of recovery adjustment embodied in these deliberate hybrid rules is rarely capable of serving its underlying goal.

Abstract:
Well-rooted in modern commercial law is the idea that the law should reflect the performance practices formed among the parties throughout their interaction. The reality of the relationship can supplement and vary the original rigid obligations. The generous recognition of waiver and modifications as well as the binding force of course of performance are the highlights of this approach. This Article examines the effectiveness of this approach. On the one hand, the power of immanent practices to erode the explicit contractual provisions creates more flexibility in commercial life. This is the 'flexibility effect' that the drafters of the Code intended. On the other hand, the potential erosion encourages rightholders to take greater anti-erosion measures. Facing the risk that a non-conforming practice might modify their rights, parties will exhibit greater rigidity in enforcing strict adherence to the express provisions. This is the less emphasized 'rigidity effect.' The article demonstrates that the flexibility effect and the rigidity effect will normally balance out. Immanent practices doctrines appear to be irrelevant. Whether or not contract law is willing to peek beyond the express terms and to search for immanent norms makes no difference in determining contractual performance. The Article then turns to examine various subtle reasons that could lead to the breakdown of this irrelevance claim, i.e., that could explain the way in which past practice doctrines make a difference. This exploration demonstrates that factors like imperfect information or the structure of enforcement mechanisms might influence the value of contractual rights and generate a societal preference for one regime over another. It concludes that if the Code's past practices rules have any relevance, then the type of flexibility that they promote makes contracting parties worse off.

Abstract:
Well-rooted in modern commercial law is the idea that the law should reflect the fact-patterns of common life. The Uniform Commercial Code champions this tradition by viewing the performance practices formed among the parties throughout their interaction as a primary source for interpreting and supplementing their explicit contracts. The generous recognition of waiver and modifications, as well as the binding force the Code accords to course of performance, course of dealings, and trade usages, effectively permit the unwritten commercial practices to vary and erode explicit contractual provisions. This approach, which allows the reality of the relationships to supplement and vary the original rigid manifestation of assent, has long been celebrated for its realist, non-formalist spirit.

This Article takes a closer look at the effectiveness immanent law. It compares two effects that the flexibility-promoting doctrines generate. On the one hand, the power of immanent practices to erode the explicit contractual provisions creates more flexibility in commercial life. This is the ?flexibility effect' that the drafters of the Code intended. On the other hand, the potential erosion encourages rightholders to take greater anti-erosion measures. Facing the risk that a non-conforming practice might modify their rights, parties will exhibit greater rigidity in enforcing strict adherence to the express provisions. This is the less emphasized ?rigidity effect.' The article demonstrates that the flexibility effect and the rigidity effect of the erosion doctrines will normally balance out. If the law is flexible, parties will be rigid, and vice versa. Prima facie, the formalism of contract law?whether or not it is willing to peek beyond the manifestation of assent and to search for immanent norms?makes no difference in shaping the de facto value of rights and duties.

This "irrelevance" result challenges the validity of traditional as well as more recent conjectures regarding the effect of the Code's search for immanent business norms. The Article then turns to examine various subtle reasons that could lead to the breakdown of the irrelevance claim, i.e., that could explain the way in which past practice doctrines make a difference. This exploration demonstrates that factors like imperfect information or the structure of enforcement mechanisms might influence the value of contractual rights and generate a societal preference for one regime over another. It concludes that if the Code's past practices rules have any relevance, then the type of flexibility that they promote makes contracting parties worse off.

Abstract:
There are many situations in which legal rights erode as a result of their past breach. A party may be unable to enforce an explicit legal entitlement--but only to the extent that she failed to enforce it in the past. When rights are being challenged repeatedly, anything less than rigorous enforcement by the rightholder may be translated by law into an implicit permission to continue these violations prospectively. The doctrines of course of performance in contract law and adverse possession in property law are prominent examples. This paper analyzes the effects of such laws on the value of entitlements. It confronts two conflicting intuitions. On the one hand, the "license" to commit prospective violations as a result of past breach may seem to diminish the value of the right. On the other hand, the fear of losing her right in this manner may reinforce the rightholder's motivation to protect her right, bolstering the credibility of her threat to sue against violations, thus better deterring violations. The paper proves and illustrates the perhaps surprising result, that these two conflicting effects always balance out. That is, erosion doctrines do not affect the value of the right. A rightholder will endure the same amount of violations, regardless of the law's willingness to alter rights and duties according to their past breach. In other words, in a fundamental way, erosion laws are neutral, irrelevant. The article demonstrates the applicability of this insight to various areas of law and its implications to traditional analyses of related doctrines.

An earlier version of this article was announced as University of Michigan Law School, Law and Economics Working Paper No. 99-002. The working paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=112888

Abstract:
There are many situations in which legal rights erode as a result of their past breach. A party may be unable to enforce an explicit legal entitlement -- but only to the extent that she failed to enforce it in the past. When rights are being challenged repeatedly, anything less than rigorous enforcement by the rightholder may be translated by law into an implicit permission to continue these violations prospectively. The doctrines of course of performance in contract law and adverse possession in property law are prominent examples. This paper analyzes the effects of such laws on the value of entitlements. It confronts two conflicting intuitions. On the one hand, the "license" to commit prospective violations as a result of past breach may seem to diminish the value of the right. On the other hand, the fear of losing her right in this manner may reinforce the rightholder's motivation to protect her right, bolstering the credibility of her threat to sue against violations, thus better deterring violations. The paper proves and illustrates the perhaps surprising result, that these two conflicting effects always balance out. That is, erosion doctrines do not affect the value of the right. A rightholder will endure the same amount of violations, regardless of the law's willingness to alter rights and duties according to their past breach. In other words, in a fundamental way, erosion laws are neutral, irrelevant. The article demonstrates the applicability of this insight to various areas of law and its implications to traditional analyses of related doctrines.

Abstract:
This article argues that the cost of odious debt ought to be borne by the party who is best positioned to prevent the accumulation of such debt. Creditors should bear odious debt liability - be barred from recovering the debt - to the extent that they could have taken measures to reduce the risk of forfeiture or to monitor the use of the money. Such liability would induce better care in funding decisions. At the same time, the magnitude of creditors' liability should reflect only the true social harm of odious debt. Even despotic regimes direct some of the funds to benefit the populace. Accordingly, creditors' liability ought to extend only to the fraction of the debt that served odious purposes. Effectively, liability for odious debt would be shared by the creditors and populace, with the relative shares depending on comparative blameworthiness, assessed from an economic, incentive-oriented perspective. After developing this principle, the paper explores ways in which it can be implemented.

Abstract:
This article examines the stickiness of default rules and boilerplate terms in contract law. It argues that parties who choose to deviate from well entrenched defaults may face hurdles beyond the direct transaction costs of drafting. The mere deviation from standard terms by a proposing party may in and of itself raise suspicions for counterparties. It may conjure concerns over hidden aspects of the deal and tricky motivations - a fear of the unknown. Thus, regardless of the direct value of a non-standard, tailored term, a deviance cost associated with its proposal may offset or even cancel its benefit. Under this account, default rules are stickier, and boilerplate terms less prone to innovation, than currently perceived. The article demonstrates the existence of such stickiness by identifying default rules that vary across jurisdictions. In the absence of high transaction costs (or significant network/learning effects), one would expect robust opt-out from an undesirable default in at least some jurisdictions; unimpeded parties should gravitate toward the efficient rule. The absence of such opt-out, in any jurisdiction, is consistent with this account of stickiness.

Abstract:
Should willful breach be sanctioned more severely than inadvertent breach? Strikingly, there is sharp disagreement on this matter within American legal doctrine, in legal theory, and in comparative law. Within law-and-economics, the standard answer is "no" - breach should be subject to strict liability. Fault should not raise the magnitude of liability in the same way that no-fault does not immune the breaching party from liability. In this paper, we develop an alternative law-and-economics account, which justifies super-compensatory damages for willful breach. Willful breach, we argue, reveals information about the "true nature" of the breaching party - that he is more likely than average to be a "nasty" type who readily chisels and acts in dishonest ways, and may have acted in other self-serving, counter-productive ways, which went undetected and unpunished. Willful breach triggers extra resentment for what underlies it - for all the other bad things that the breaching party likely did, or, more basically, for the ex ante choice he made to engage in such pattern of behavior. Thus, when the party is caught in the act of willful breach, he is punished not merely for this act, but for the (probabilistically) inferred mesh of bad conduct. This account provides a concrete foundation for the notion that willful breach violates the "sanctity of contract." We show that some remedial doctrines are consistent with the information-based account.

Abstract:
What if consumer contracts were legally enforceable only against the consumers, but not against the business? This paper, part of my project on the “myths of consumer protection,” describes a regime of “one-way contracts” - contracts between consumers and business to which only consumers are bound, the business is not. A breaching business would face no contractual liability. The paper argues that many consumer contracts are already disguised one-way contracts. It then demonstrates the variety of alternative consumer protections devices that would emerge in the total absence of legal protection. In a one-way contracts world, transactions will be redesigned to limit consumers’ exposure to breach; insurance and bond services would develop to protect aggrieved consumers; reputation services and rating intermediaries would have a greater role; and public enforcement could potentially fill some of the remaining deterrence gaps. Thus, despite weakening the legal protections, the one-way contracts regime has the potential to improve consumer well being. The paper concludes that the focus within the consumer protection movement on enhancing access to, and the scope of, legal remedies may be misguided.

Abstract:
Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of reasonable investment or the benefit conferred, can provide optimal incentives to invest. This article demonstrates that the law often awards recovery that is neither purely cost-based nor purely benefit-based and instead equals either the greater or lesser of the two measures. These hybrid approaches to recovery distort compensation and incentives. The article demonstrates the surprising prevalence of these practices and explores informational and institutional reasons why they emerge.

Abstract:
Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of the investment or the benefit it confers, can provide optimal incentives to invest. However, this article demonstrates that the law often awards recovery that is neither purely cost-based, nor purely benefit-based, and instead equals either the greater-of or lesser-of the two measures. These hybrid approaches to recovery distort incentives to invest. The article demonstrates the prevalence of these practices, and explores informational and related reasons why they emerge. It argues that they generally are ill-suited to promote rational policies.

Abstract:
How can a prosecutor, who has only limited resources, credibly threaten so many defendants with costly and risky trials and extract plea bargains involving harsh sentences? Had defendants refused to settle, many of them would not have been charged or would have escaped with lenient sanctions. But such collective stonewalling requires coordination among defendants, which is difficult if not impossible to attain. Moreover, the prosecutor, by strategically timing and targeting her plea offers, can create conflicts of interest among defendants, frustrating any attempt at coordination. The substantial bargaining power of the resource-constrained prosecutor is therefore the product of the collective action problem that plagues defendants. This conclusion suggests that, despite the common view to the contrary, the institution of plea bargains may not improve the well-being of defendants. Absent the plea bargain option, many defendants would not have been charged in the first place. Thus, we can no longer count on the fact that plea bargains are entered voluntarily to argue that they are desirable for all parties involved.

prisoners, plea, bargain, dilemma, prosecutor, defendant, sentences, trial, Bar-Gill, Ben-Shahar

Abstract:
Legal rights may erode as a result of past, uncontested, breach. In light of ongoing violations, the rightholder's lackluster enforcement may result in the loss of the entitlement. The doctrines of course of performance in contract law and adverse possession in property law are prominent examples of this widespread erosion phenomenon. In analyzing the effects of such laws, the article confronts two conflicting intuitions. On the one hand, the 'licence' to continue breach prospectively encourages opportunism. On the other hand, the risk of erosion may reinforce the rightholder's motivation to take antierosion measures, bolstering the credibility of the threat to enforce, thus better preserving the entitlement. The article proves that these two effects of erosion rules always balance out. The same amount of value will be extracted from the rightholder, irrespective of the law's erosion doctrine. The article also demonstrates the limits of this 'irrelevance' claim and the factors that may lead to its collapse. It applies the analysis to offer new perspectives on various prominent legal rules.

Abstract:
Two years after Penzoil v. Texaco threatened to burst the seam of contract formation and find binding commitments before negotiations ended, Judge Easterbrook stitched the rupture. His landmark decision in Empro v. Ball Co. held that a letter-of-intent, which is subject to the preparation of a more comprehensive formal document, is not binding. Each party can freely walk away from it prior to the closing, without incurring any liability and without the court scrutinizing the reasons for the negotiations breakdown. Many courts have since cited and followed Judge Easterbrook’s approach. In this commentary, I argue that that this freedom to walk away from negotiations is too broad and in conflict with the ex ante interests of the parties. Intermediate liability at the pre-closing stage would induce more efficient levels of precontractual reliance, benefitting both parties. I develop one possible foundation for an intermediate liability regime and demonstrate how it would apply in the case.

Abstract:
This Essay adds to the existing literature on expectation damages. It suggests that this literature is implicitly based on the assumption that, in the event of breach, the breached-against party will readily reveal the information necessary to establish the magnitude of expectation damages. It explores the implications of the opposite assumption, namely that an aggrieved party might often prefer to keep the information necessary to establish the magnitude of expectation damages private. More specifically, it suggests that while the traditional literature on remedies has focused on the aggrieved party's interest in being made whole (her "compensatory interest"), there is another, potentially conflicting interest that needs to be taken into account, namely her desire to keep information private (her "secrecy interest"). When the secrecy interest is sufficiently strong, the cost of revealing the underlying private information may well exceed the aggrieved party's expected recovery at trial. As a consequence, the aggrieved party may not file suit and may therefore receive no compensation. If the existence of a promisee's secrecy interest is known to a promisor who is contemplating breach, the secrecy interest might undermine the credibility of the promisee's threat to sue. Thus, in the presence of a secrecy interest, both the remedial goal of full ex post compensation and the economic goal of efficient breach-or-perform incentives are unlikely to be achieved.

The Essay develops the concept of the secrecy interest in more detail and considers how taking it into account might contribute to the debate over the desirability of several of the Code's remedial provisions, the remedial structure of the new proposed Code, and aspects of existing adjudicative procedures. It demonstrates the secrecy violations involved in adjudication under current contract law doctrine. It argues that the Code and the rules of civil procedure should enable aggrieved parties to opt for damage measures and discovery procedures that do not involve information revelation, such as specific performance, liquidated damages and uncapped market difference damages.

Abstract:
In designing and marketing new products, manufacturers face uncertainty regarding the harmful nature of their products. If harm occurs due to a defective design, liability is imposed on manufacturers whenever the design of the product is determined to be unreasonably dangerous. In assessing the reasonableness of a design, courts often -- although the doctrine is not settled -- admit information which was acquired throughout the actual usage of the product -- information that often was not scientifically available at the time of production. The asbestos litigation is a prominent example of this controversial practice. This paper examines the incentive effects of such hindsight. It demonstrates that the utilization of information that is available ex post but was not available ex ante may lead to adverse incentive effects: (1) in installing safety devices in products; (2) in developing technologies that are less risky; and (3) in investing in research that can identify the risks in advance. Yet, such hindsight unambiguously improves incentives to make safety adjustments subsequent to the distribution of the product. While the overall welfare effect of hindsight is ambiguous, the paper identifies particular circumstances in which hindsight is likely to reduce social welfare. The analysis offers partial justification for some controversial stances taken by the Restatement (Third) of Products Liability.

Abstract:
In designing and marketing new products, manufacturers face uncertainty regarding the harmful character of their products. If harm occurs due to a defective design, liability is imposed on manufacturers whenever the design of the product is determined to be unreasonably dangerous. In assessing the reasonableness of a design, courts often -- although the doctrine is not settled -- admit information which was acquired throughout the actual usage of the product -- information that often was not scientifically available at the time of production. The Asbestos litigation is a prominent example of this practice. This paper examines the incentive effects of such hindsight. It demonstrates that the utilization of information that is available ex post but was not available ex ante may lead to adverse incentive effects, (1) in installing safety devices in products, (2) in developing technologies that are less risky, and (3) in investing in research that can identify the risks in advance; yet it unambiguously improves incentives to make safety adjustments subsequent to the distribution of the product. While the overall welfare effect of hindsight in assessing liability is ambiguous, the paper demonstrates that it may reduce the utility of consumers and manufacturers alike.

Abstract:
This article explores a new rationale for the sanctions imposed on pre-crime activities such as attempt and preparation. It argues that these sanctions serve a role previously unnoticed, in influencing the incentives of crime victims to invest in precautions prior to the crime. It demonstrates that victims' investment in precautions would otherwise be non-optimal, since the benefits victims gain from their precautions diverge from the social benefit. The article argues one way criminal law policy may resolve this distortion and provide victims with optimal incentives is by tuning the sanctions inflicted upon criminals according to their victims' conduct. A victim who engages in non-optimal precautions is regarded "at fault", and the sanction to its offender will be reduced. Fearing the decline in the deterrent effect, victims will be induced to engage in optimal precautions. Applying this idea, the article offers a justification for the lenient legal treatment of pre-crime activities. The punishment for attempts affects the incentives of potential victims to take measures which lead attempts to fail. The more lenient the punishment for attempts, the smaller the return to victims' prevention measures. The degree of leniency can potentially be tuned to provide optimal prevention incentives for victims.