An Experiment in the Optimal Precision of Contract Default Rules

Abstract:     
This Article conducts an empirical experiment to shed light on a simply stated, but vexing, question in contract law: What is the optimal precision of legal default rules? Should lawmakers pick just one simple default rule for an entire legal system, or should they design more complex default rules to offer customized legal treatment for different markets - or even for different parties?

The Article uses empirical data and analytical modeling to explore this problem of default rule precision. I do not presume to offer a comprehensive theory, but the experiment should help to define the contours of the problem a bit more clearly. Empirical work is perfectly suited for gnawing at the corners of a tough problem, and hopefully this Article will make a little headway on the trade-offs between simple and complex default rules in contract law.

The main claim of the Article is that simple default rules often do seem better than complex ones - at least for the markets and rules used in this experiment. I am unable to draw more definitive conclusions because the work relies, at least in part, on assumptions for some of the variables. Overall, however, there are reasons to believe that contract law should usually prefer simple default rules and leave more detailed adjustments of these rules to the contracting parties.

This abstract is taken from an article titled An Experiment in the Optimal Precision of Contract Default Rules, by George S. Geis, published in 80 TUL. L. REV. 1109 (2006). Reprinted with the permission of the Tulane Law Review Association, which holds the copyright.

Keywords: contract theory, law and economics, empirical analysis, valuation

JEL Classification: K12

Accepted Paper Series