Writing the Fine Print: The Economics of Legalese

Abstract

The purpose of this paper is to provide a rational choice defense of the persistence of jargon-like "fine print" or "legalese" in contractual agreements. While common arguments for its continued use include creating artificial demand for lawyers, enhancing precision, or simple path-dependence, never has it been defended specifically for its costliness. In this paper I posit an alternative theory of the use of "legalese" in contracts whereby individuals writing contracts are engaged in a game where the threat to enforce the contract needs to be credible under a regime of costly enforcement. Legalese thus acts as a relatively less-costly signal that the writer of the contract is wealthy enough to afford a lawyer or educated enough to write like one, effectively intimidating the signer of the contract into being less likely to renege. Since in the long run both parties would prefer to be able to sign binding contracts, legalese serves as a second best way to make everyone better off.

Keywords: Game Theory, Law and Economics, Contract Theory, Signaling

JEL Classification: C7, K, D86