Regulating Opt Out: An Economic Theory of Altering Rules

62 Pages Posted: 29 Sep 2011 Last revised: 15 May 2012

See all articles by Ian Ayres

Ian Ayres

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

Date Written: September 27, 2011

Abstract

Whenever a rule is contractible, the law must establish separate rules governing how private parties can contract around the default legal treatment. To date, contract theorists have not developed satisfying theories for how optimally to set “altering rules,” the rules that set out the necessary and sufficient conditions for displacing a default. This Article argues that efficiency-minded lawmakers in setting altering rules should consider both the costs of altering and the costs of various kinds of error. There are two broad reasons for altering rules to deviate from attempts to minimize the transaction cost of altering, First, the Article develops theoretical conditions when minimizing the costs of party error (especially non-drafter error) and third-party error (especial judicial error) will be paramount. The Article proposes a variety of specific altering interventions – including “train and test” altering rules, “arbitrary” altering rules, and “thought-requiring” altering rules that might be deployed to reduce altering error. Second, when externalities or paternalism concerns are insufficient to justify a full-blown mandatory rule, lawmakers might usefully impose “impeding” altering rules which deter subsets of contractors from contracting for legally dispreferred provisions. Impeding altering rules produce an intermediate category of “quasi-mandatory” or “sticky default” rule which manage but do not eliminate externalities and paternalism concerns. These two deviations from transaction-cost minimization can often be usefully complemented by what this Article calls “altering penalties” which penalize one or both contractors who utilize dispreferred altering methods. Specifically, altering penalties can channel contractors’ altering efforts toward means that better reduce error or better control externalities or paternalism. More explicitly theorizing altering rules as a distinct category of law can make visible legal issues that have largely gone unnoticed and lead toward the development of more defensible choices about how best to regulate opt out.

Suggested Citation

Ayres, Ian, Regulating Opt Out: An Economic Theory of Altering Rules (September 27, 2011). Yale Law Journal, Vol. 121, 2012. Available at SSRN: https://ssrn.com/abstract=1934412

Ian Ayres (Contact Author)

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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