A Bargaining Power Theory of Gap-Filling
University of Chicago Law School
July, 17 2008
U of Chicago Law & Economics, Olin Working Paper No. 416
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.
Number of Pages in PDF File: 44
Date posted: July 21, 2008