Default Rules in Contract Law as Response to Status Competition in Negotiation

Abstract:     
This Article discusses another role for default rules--reducing costs of status competition. Default rules principally serve to reduce transaction costs and strategic behavior costs, but they also accomplish other functions. The hypothetical behavior of parties that measure the costs and benefits of the transaction in absolute terms provide a basis transaction and strategic behavior cost analysis. Parties in actual negotiations, however, often shift to measuring things in relative terms because of concerns about status. The participants enter into contract negotiations to achieve gains from trade. The process of negotiation itself, however, may become a competition. Rather than simply trying to achieve their original goals, parties sometimes shift in whole or in part to "win" the bargaining. Such status competition may have two types of costs. It may increase the resources expended in bargaining by making the negotiations longer or more complex, and it may reduce gains from trade by causing negotiations to fall through. The shift can harm the parties as a whole by changing the negotiation from one with potential gains from trade for both parties to one where any gain for one party results in a perceived loss to the other party. This Article addresses how default rules of contract law may operate to reduce such costs of status competition during negotiation.

Keywords: contract, default, status competition, negotiation, transaction costs

Accepted Paper Series