Compensating Commitments: The Law and Economics of Commitment Bonds That Compensate for the Possibility of Forfeiture

56 Pages Posted: 21 May 2010

See all articles by Michael Abramowicz

Michael Abramowicz

George Washington University Law School

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Date Written: May 20, 2010

Abstract

This Article introduces compensating commitment bonds, which make it more affordable for a government, entity, or individual to commit to some course of action. These bonds, like traditional government or corporate bonds, can generate revenue for committing parties. A bond seller makes a commitment and promises to pay a forfeit if the seller fails to meet the bond conditions. The bond buyer pays the seller to be contractually designated as the recipient of any amounts the bond seller forfeits. This approach has potential application in a range of legal situations. Governments and other parties may use such bonds to facilitate commitments to principles from which they later may face temptation to deviate. Such bonds also can facilitate legislative compromise or the settlement of private legal disputes. The Article identifies a variety of incentive-equivalent commitment bond structures as well as the circumstances under which a particular implementation is likely to be most effective. It also explores hurdles to the use of such bonds, including the concerns that the courts might find a legislature’s use of such bonds to entrench its preferences unconstitutional and that a legislature might issue such bonds but cancel them after failing to maintain a commitment.

Suggested Citation

Abramowicz, Michael B. and Ayres, Ian, Compensating Commitments: The Law and Economics of Commitment Bonds That Compensate for the Possibility of Forfeiture (May 20, 2010). Available at SSRN: https://ssrn.com/abstract=1612396 or http://dx.doi.org/10.2139/ssrn.1612396

Michael B. Abramowicz (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

Ian Ayres

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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