Compensating Commitments: The Law and Economics of Commitment Bonds That Compensate for the Possibility of Forfeiture
George Washington University Law School
Yale University - Yale Law School; Yale University - Yale School of Management
May 20, 2010
This Article introduces compensating commitment bonds, which make it more affordable for a government, entity, or individual to commit to some course of action. These bonds, like traditional government or corporate bonds, can generate revenue for committing parties. A bond seller makes a commitment and promises to pay a forfeit if the seller fails to meet the bond conditions. The bond buyer pays the seller to be contractually designated as the recipient of any amounts the bond seller forfeits. This approach has potential application in a range of legal situations. Governments and other parties may use such bonds to facilitate commitments to principles from which they later may face temptation to deviate. Such bonds also can facilitate legislative compromise or the settlement of private legal disputes. The Article identifies a variety of incentive-equivalent commitment bond structures as well as the circumstances under which a particular implementation is likely to be most effective. It also explores hurdles to the use of such bonds, including the concerns that the courts might find a legislature’s use of such bonds to entrench its preferences unconstitutional and that a legislature might issue such bonds but cancel them after failing to maintain a commitment.
Number of Pages in PDF File: 56working papers series
Date posted: May 21, 2010
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