Inertia and Preference in Contract Negotiation: The Psychological Power of Default Rules and Form Terms
35 Pages Posted: 7 Sep 1998
Traditional law and economics analysis assumes that negotiating parties' preferences for contract terms are formed independently of legal rules and the structure of negotiations. In this article, Professor Korobkin challenges this conventional wisdom, offering instead an "inertia theory" of contract negotiation. The inertia theory predicts that parties' preferences will be biased in favor of contract terms that will operate in the absence of specific agreement to the contrary. In some cases, this bias will cause parties to favor legal default terms; in other cases, this bias could cause parties to favor terms in form contracts that serve as a basis for negotiations or even terms provided by one party in an initial draft contract. The article first demonstrates the inertia theory by providing data from a series of laboratory experiments. These show that subjects playing the role of lawyers in contract negotiating settings place a higher value on contract terms that will take effect in the event of inaction on the part of the negotiators than on those that will take effect only if the negotiators act affirmatively. The article then develops a motivational theory to explain the power of inertia in the formation of preferences, drawing on psychological literature on regret. It contends that the inertia theory is understandable because decisions not to act cause less ex post regret than decisions to act. Experimental evidence consistent with this hypothesis is then presented.
Note: This is a description of the paper and is not the actual abstract.
JEL Classification: D81, D82
Suggested Citation: Suggested Citation