Rational Ignorance, Rational Closed-Mindedness, and Modern Economic Formalism in Contract Law
37 Pages Posted: 25 Feb 2009 Last revised: 3 Nov 2009
Date Written: July 1, 2009
This article identifies modern economic formalism in contract law as little more than an incorrect argument for rational ignorance in courts. Distinct from other varieties of contract formalism, modern economic formalism rests on the notion that information beyond the text of contracts is a valuable interpretive aid -- but not valuable enough to justify its costs, at least for rational, risk-neutral parties.
In this article, I challenge the leading argument for this kind of formalism, made by Alan Schwartz and Bob Scott. Most fundamentally, Schwartz and Scott's noted argument conflates probability with uncertainty, and as a result is fundamentally circular. Their argument also draws untenable distinctions between gap-filling and interpretation, and it fails to recognize that under the strong assumptions it adopts, contracting parties would be unlikely to litigate disputes in the first place.
Keywords: contracts, interpretation, formalism, rational ignorance, law and economics
JEL Classification: K12
Suggested Citation: Suggested Citation